The Competitiveness of Nations in a Global Knowledge-Based Economy
Institutional Economics
American Economic Review, 26 (1)
Mar. 1936, 237-249.
I am attempting in this paper to give only a theory of institutional economics as derived from the decisions of the Supreme Court of the
Economic science has not, to my knowledge, incorporated within itself a theory of reasonable value. It separates ethics, public welfare, or national public interest as a postscript, different from economic theory. But a theory of reasonable value, which shall include these postscripts, has become obligatory, in
The economic theories of the past hundred and sixty years were started, in the year 1776, with Jeremy Bentham’s repudiation of Blackstone. Thereafter economists went off on theories of happiness, but courts and lawyers continued on the theory of the common law of
A primary difference between the two is that the
common law is built on conflicts of interest between plaintiffs and
defendants, but with the sovereign, in the person of a judge, deciding, in
each case as it arises, what is reasonable between the two, both in their
conflicting private interests and in the public interest for which the
sovereign is responsible.
But the happiness theory started with an assumed harmony of interests. It could be none other than individualistic and cosmopolitan without any nationalistic public interest. Only an individual can feel pain and pleasure. Bentham consistently treated all individuals as a world census of population and not as national organized societies, wherein the pleasure of one is often the pain of others. Stating it in technical economic terms, Bentham started, as one may derive from what Mitchell names his “felicific calculus,”
1 with the simplified assumption of an individual seeking his own maximum net
1. Cf. W. C. Mitchell, “Bentham’s Felicific
Calculus,” Political Science Quarterly, XXXIII, 161 (1918).
237
income of happiness by seeking the maximum gross
income of pleasure and reducing to a minimum his gross outgo of pain.
The spread between the two was the net
pleasure of happiness for the individual, but regardless, obviously, of the
pains, pleasures, or happiness of other individuals.
This happiness economy was readily converted, as Bentham did, into a money economy. The individual seeks his maximum net income of money by maximizing his gross income of money and reducing to a minimum his gross outgo of money, regardless, by analogy to net pleasure, of the effect on others arising from the fact that his maximum gross sales income is the maximum amount of money that he can obtain from others as buyers, and that his minimum gross outgo of money is the smallest amount of money he is forced to pay to sellers. The spread between the two is a maximum profit or minimum loss economy,
2 regardless of the consequences to others.
Finally, when Bentham’s individual becomes the
collective owners of a corporation, acting as a unit, the same maximum net
money income is sought for the owners as a whole, regardless of the effects on
buyers of the maximum prices paid by them for products and services, or the
effects on sellers of the minimum prices paid to them for materials and labor.
Since corporations are falsely treated as
individuals, I name these theories maximum net-income economics instead of
individualistic economics. This is a
technical phrasing of the net-income maxim, “buy in the cheapest market and
sell in the dearest market”; to which, in its simplified assumption, should be
added, “without consideration of methods or effects on others.”
I am speaking of the working hypothesis of pure
self-interest, from Bentham to marginal utility.
It is a maximum net-income economics.
In recent years the theory has
incorporated certain institutional factors, like patents, trade names, trade
marks, goodwill, under such names as “imperfect competition,” “monopolistic
competition,” “competitive monopoly.” 3
Yet
2. I know that this assumption of disregard of
others, in obtaining the maximum net income, will be denied by economists as
involved in their theories, and that they place a natural limit on net incomes
by the law of supply and demand.
Yet I think they quite properly follow Adam Smith who wrote, “I have never
known much good done by those who affected to trade for the public good.
It is an affectation, indeed, not very common among merchants, and very
few words need be employed in dissuading them from it.”
Smith and followers rested their case on the public interest in
increase of wealth to be derived from individual initiative.
But economic history shows that at
times too much wealth is produced by individual initiative and at other times
too little wealth is produced. This is
because the law of supply and demand has a double meaning, the traditional
meaning of producing and consuming material products and the institutional
meaning of selling and buying rights of ownership.
There are thus two laws of supply and
demand - the consumers’ law and the business law.
The business men buy in order to sell
and they buy and sell over and over again far more often or far less often the
given rights of ownership than there are products produced and delivered.
But the consumer buys only once, and
he buys once only as much as he wants to consume.
It is a difference both in kind and in
velocity. The first is a speculative
law of supply and demand. It rests on
the legal tradition that his profits are his own - why can he not do what he
wants to do with his profits regardless of the effects on others of cycles of
over-speculation and under-speculation. The
second is a producers’ and consumers’ law of supply and demand suited to
precapitalistic or home economics.
3. Cf. Edw. Chamberlin, The Theory of
Monopolistic Competition (1933) Joan Robinson, The Economics of
Imperfect Competition (1933) and references there cited.
238
even with these added evolutionary complexities
the theory continues to be a maximum net-income economics, regardless of
others. Its characteristic problem is
that of the optimum size of an individual establishment for obtaining the
maximum net income of money.
But these new factors thus introduced bring to
the front two additional points of view; namely, the effect on other persons
and the public purpose involved. These
two aspects are combined by the Court in the meaning of reasonable value.
While a patent right may augment the net income
of its owner by means of the monopolistic privilege which it affords, yet for
three hundred years in England and America this augmentation has been
justified, for a limited period of time, as differing from other sovereign
monopolies in that it is granted only for new inventions or discoveries, and
thereby fulfills the public purpose of inducing individuals to augment the
national wealth while endeavoring to augment their private net incomes.
And while the goodwill of a competitive business
is perhaps its most valuable modern asset towards augmenting its net income,
in that it lifts its owner above the level of the free competition of
traditional economics, yet it differs from other monopolies in that it exists
only as long as its owner fulfills the public purpose of rendering to others
what they willingly agree are reasonable services at reasonable prices.
The Supreme Court has definitely
decided that a monopolistic corporation, like a gas company, shall not be
permitted to set up a goodwill value as a justification for charging its
monopolistic prices. 4
The
goodwill of a business or profession is indeed the most perfect competition
known to the law. It is founded,
however, on the three economic conditions, not of pleasure, pain, or maximum
net income, but of equal opportunity, equality of bargaining power, and public
purpose. Thus understood, goodwill is
the
Goodwill is, further, the meeting point of pure
institutional economics and pure net-income economics.
It has two sides.
On the net-income side it augments the
private net income beyond that of competitors.
On the institutional side it is the reasonable ethical relation
towards other buyers and sellers, who are also members of the same national
economy.
When the courts reduce their standard of
goodwill and reasonable value to its simplest assumption, which they derive
from the common law, it rests on the maxim of a willing buyer and a willing
seller. In technical
4. Wilcox v. Cons. Gas Co., 212
239
language this rests on the fact that the gross income of money acquired by a seller is the identical gross outgo of money given up by a buyer in a single transaction, since it is merely a transfer of ownership; whereas, in net-income economics, the net income is the spread between maximum gross income of money and minimum gross outgo of money of one party who is a buyer in one transaction and a seller in another transaction. There can arise no question of reasonableness in maximum-net-income economics. It is only a question of economic power
. 5 But the institutional economics of willingness takes into account the ethical use of economic power in a single transaction where the gross income acquired by one is a transfer of ownership of the identical gross outgo alienated by another. While the one may be named the maximum net-income economics of one person in two transactions the other is the gross-income-outgo economics of two persons in one transaction.
If I trace the beginning of maximum net-income
economics to Jeremy Bentham in 1776, I find the beginning of goodwill
economics in the year 1620, when the judges of the highest courts of
5. Maximum net income, in modern economics, is
maximum net profits. Statistically it
is found in the income tax reports of the Internal Revenue Department.
On margin for profits, that is, net
income of profits, see Commons, Institutional Economics, pp. 526ff.
(1934).
6. Jolyffe v. Brode, Cro. Jac. 596
(1620). Also reported in Nov 98, 2
Rolle 201, W. Jones 13. Commons,
Legal Foundations of Capitalism, p. 263. This
case was one where the seller of a carpenter shop agreed to refrain from
competition with the buyer. The
decision sanctioned what afterwards became known as a going-concern value,
considerably in excess of the value of the physical plant.
On the merger of common law and
equity, see H. Lévy-Ullman, The English Legal Tradition (tr. 1935).
7. The formula of gross-income-gross-outgo
applies to both selling and buying transactions.
In a selling transaction the gross
money income of the seller of his product or services is the identical gross
money outgo of the buyer, because he merely transfers the ownership of the
identical money to the seller. Reciprocally,
in the same transaction, the money value of the seller’s output of products or
services, whose ownership is transferred [by
the seller, is the identical money value, at the time, of the gross income of
products or services whose ownership is acquired by the buyer.
But the seller has also, in a preceding
transaction, been a buyer of the materials and labor, which he then converts
into his own products or services which he afterwards sells.
Hence the same formula of
gross-outgo-gross-income applies, but inversely, to his previous buying
transaction.
This meticulous twofold formula would usually be
taken as an elaboration of the obvious and a superficial and commonplace
notion of money as both a medium of exchange and a measure of value.
But there are certain observations in
institutional economics that follow from this obvious fact.
The so-called “exchange” of money, materials or
services is not an exchange of physical products or material services, as
assumed by the classical and hedonistic economists.
It is two transfers of two ownerships.
The physical delivery occurs after the
ownership is transferred. Hence the
term “transaction” is appropriate instead of “exchange.”
A transaction means the negotiations culminating in two transfers of
ownership. But ownership and its
alienation are created solely by the institution of sovereignty.
Likewise, the money used as a medium of exchange
and measure of value is solely a legal tender creation by sovereignty.
This has been expounded recently in the gold clause decisions.
If credit is used instead of money, it
also is the legal creation of debt. The
price, or money value, therefore, paid by a buyer, is not, as assumed by
traditional economics, a price paid for materials, or services, or labor, but
is a price paid for ownership of the materials, services, or labor.
The price is a valid price only
because the state protects the new owner as it did the former owner.
The legal test of validity is the
Court’s determination of willingness of each at the time of the transaction.
Again the precise time of transfer of ownership
is of importance in the measurement of value.
This is because two debts are created by the transaction at a point of
time - a debt of payment and a debt of performance.
These debts are equivalent to the
value willingly agreed upon in the transaction.
The debt of payment is released by a
payment of legal money. The debt of
performance is released by physical delivery of the materials, services, or
labor, as measured by other legal units. It
was this physical delivery of materials that became the subject matter of the
traditional exchange-value. But it is
ownership delivery that is the subject matter of institutional economics.
The two were identified on account of
the double meaning of a commodity, which is a physical thing which is owned.
After the date of the transaction when the two
ownerships of money and commodities have been transferred by operation of law,
there may be greater or less changes of values in the hands of new owners,
commuted mainly as risk and interest. But
at the precise date of the transaction the value of the gross outgo or gross
income of materials, services, or labor are, by agreement, by contract or by
debt, identical with the amount of money paid or received.
This is true, no matter how high or low, how
oppressive or onerous, how coercive or intimidating, how fair or
discriminatory, is the monetary price, nor how large or small is the quantity
of money, materials, services, or labor power, whose ownership is alienated by
one and acquired by the other.
For these reasons I do not think that
institutional economics, defined as collective action in control of individual
action, is contrary to the so-called pure economics of the past, which is
individual action without collective control.
It is a continuation of pure economics into a higher degree of
complexity by incorporating the reasonable value of willingness into the
already expanding maximum net-income economics of exchange value.
Reasonable value is an upper and lower
limit of exchange value placed there by the American Supreme Court.
Net income economics, indeed, places
upper and lower limits of net income by the so-called law of supply and
demand. But institutional economics
places another upper and lower limit by the law of reasonable value.
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Hence the only standard that can be used by the
courts in eliminating these unfair practices and restraints from the double
transfer of ownership is the standard of a willing buyer and a willing seller,
who, by the very terms thus used, are free from all of these inequalities and
injustices. The nearest approach,
where the standard is almost perfectly reached, is in the economic quantity
known as the goodwill of a going business. Goodwill
is the realized institutional economics of the willing buyer and seller.
241
Yet the highly valuable goodwill of a business
has not, until recently, found a place in the traditional net-income
economics. I take it the reason is
that pure economics has been based on man’s relation to nature instead of
man’s relation to man. This physical
relation furnished a materialistic foundation for labor costs of production
and for diminishing utility of consumers’ physical goods.
But goodwill is purely an
institutional value, that is, so-called “intangible value,” of man’s equitable
relations with other men. Its value
may far exceed the cost of production or may fall far below the cost of
production of physical things. And its
value has no immediate relation to the satisfaction of wants.
Its value is derived solely from the
willingness of owners, without coercion, duress, or misrepresentation, to
alienate to each other their rights of ownership.
This is the simplified hypothesis of
institutional economics.
Yet I do not overlook the important
contributions to economic theory in the past, whether orthodox or heterodox.
I correlate them with institutional
economics. The classical and
communistic economists used as their measure of value the man-hour of labor.
This is evidently, since the incoming
of scientific management, the engineering economics of efficiency.
The Austrian and hedonistic
economists, deriving from Bentham, used as the measure of value the
diminishing marginal utility of consumption goods.
This is evidently the home economics
recently introduced in the college curriculum.
But institutional economics is the field of the
public interest in private ownership, which shows itself behavioristically in
buying and selling, borrowing and lending, hiring and firing, leasing and
renting. The private interests become
the field of intangible yet quantitative and measurable rights, duties,
liberties, and exposures to the liberties of others.
These are various aspects of rights of
ownership. What we buy and sell is not
material things and services but ownership of materials and services.
The correlation of engineering
economics, home economics, and institutional economics makes up the whole of
the science of political economics.
The only net-income economist, as far as I know, who took the trouble to examine these institutional factors and then consciously to exclude them from his pure economics of man’s relation to physical nature, was Böhm-Bawerk, in 1883. Others excluded them by taking them for granted without investigation. He excluded them explicitly under the names of “rights” and “relations.”
8 On examination of what he meant by these terms I find that he meant all kinds of ownership, and he limited his pure economics to the physical and psychological process of producing and consuming material things. But if his pure economic man should go along the street picking up groceries, clothing, and shoes according to their marginal utility to him, he would go to jail. He must first negotiate with an owner to whom
8. Eugen v.
Böhm-Bawerk, Rechte und Verhältnisse (1883).
242
the policemen, courts, and constitution have
given the right to withhold from him what he wants but does not own, until
that owner willingly consents to sell his ownership.
This is his exposure to the liberty of
owners, and this keeping out of jail is a part of what I mean by institutional
economics.
The legal right to withhold is therefore the
ultimate basis of all the imperfect or monopolistic competition that has begun
to creep into the pure net-income economics of marginal utility.
It may be named institutional scarcity
superimposed upon the psychological scarcity of diminishing utility.
This simplified assumption of willing buyer and
seller might well be taken as the starting point of all economic theory,
instead of starting with self-interest. It
is the ethics of economics. For
goodwill is not only customers’ goodwill, it is bankers’ and investors’
goodwill; it is the goodwill of laborers and sellers of materials, the
goodwill of landlords and tenants, even the goodwill between competitors, in
so far as may be deemed by the Court not inconsistent with the public
interest. In short, these varieties of
goodwill, from the side of net income, are the valuable expectations that
other economic classes will willingly, and therefore without duress, coercion,
or misrepresentation, repeat in the future their mutually beneficial
transactions.
The right to withhold is also the economic
foundation of reasonable value. It
came up, in its modern variety of economic coercion, with the growth of
large-scale industry and the mass bargaining power of thousands of
stockholders acting collectively as one person under the legality of
corporation finance. This collective
action is not, in fact, monopoly in the historic meaning of monopoly; it is
merely the historic meaning of private property itself, but operating on the
grand collective scale of associated property owners withholding from others
what they want until they agree to pay or work for it.
When industry reached the stage of
public utility legislation, as it did fifty years ago, an essential part of
this legislation was that of depriving owners of a portion of their right to
withhold services by commanding them to render service on the terms specified
by the Supreme Court as reasonable for both sides of the bargain.
In other cases where monopoly was not
recognized, and therefore the Supreme Court did not permit compulsory service
or price fixing, the principle of a willing buyer and willing seller led to
the law of fair competition as against the free competition of traditional
economics. Economic goodwill is the
law of fair competition.
But it was in the case of so-called public
utility corporations that the modern version of reasonable value began to
creep into exchange value. The basic
principle of a willing buyer and seller was being violated by the emergence of
large-scale corporations. The
legislatures, under the limitations deemed reasonable by the Supreme Court,
endeavored to set upper limits
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of price and lower limits of service within a
range that the Court might deem not incompatible with the ideal of a willing
buyer and a willing seller.
This principle might be named the ideal of the
common law, just as maximizing net income is the ideal of individualistic
economics. In either case, one or the
other is the most simplified assumption of its own pure economics, and might
therefore be named the first principle of the science.
But in the practical application of
the science to specific cases these simplified assumptions are necessarily
modified by consideration of what is practicable or impracticable under all
the complex circumstances of that case at that time.
In such a particular case the goal, or
first principle, sought to be reached by the practical man, whether of maximum
net income by the individualist or of willing seller and buyer by the Court,
becomes the practicable or realistic application of the abstract science to
the great complexity of favorable and unfavorable circumstances in that
specific case. This, in the decisions
of a Court, is the meaning of reasonable value.
It is reasonable because it is the
nearest practicable approach which the Court, in a specified dispute up for
decision, thinks it can make towards the idealistic assumption of a willing
buyer and willing seller.
Reasonable value, as I define it in following
the Supreme Court, is not any individual’s opinion of what is reasonable.
This is the usual objection raised
against a theory of reasonable value. There
are as many individual opinions of reasonableness as there are individuals,
just as there are as many opinions of what is pleasurable or painful as there
are individuals. Reasonable value is
the Court’s decision of what is reasonable as between plaintiff and defendant.
It is objective, measurable in money,
and compulsory.
Neither is the individual permitted to say that he was unwilling. In case of dispute, the Court alone, if only to prevent anarchy, says whether he was willing or not. He must adjust his will, if he can, to the Court’s will
. 9
So, also, individual opinions regarding the
Court’s decision itself of reasonable value, and even majority and minority
opinions within the Court, have as many differences as there are individuals.
But the Court’s decision must be
obeyed, by the use of physical force, if necessary.
Hence it is not opinions or theories that must
be obeyed; it is decisions, which take the form of compulsory orders, that
must be obeyed. Individual members of
the Court may write out their own different opinions.
But these are justifications or
criminations. They are feelings, not
acts. They are even
9.
The Court, in laying down the rule for
ascertaining reasonable value in a particular case, states, in effect, that
all conflicting theories of value must be given consideration and that to each
theory must be given its “due weight”; that is, a reasonable value of the
theory itself in its relation to all other theories of value, according to the
facts and public purposes in that case. (Smythe
v. Ames, 169 U.S. 466, 1898.) This
is because these conflicting theories of value are really partisan theories
set up by conflicting economic interests, each interest seeking for itself the
maximum net income at the expense of other interests and of the public
interest as a whole.
244
not necessary except as concessions to outside
opinion. It is the decision that
counts, and the decision is a fiat of sovereignty.
The fiat is arrived at, in this
country, by a constitutional process of majority rule within the Court.
Under other constitutions it may be
arrived at by a dictator exercising the judicial function by appointing and
removing the judges at will. It need
not then be justified and cannot be criminated without free speech.
In such cases it is arbitrary fiat,
not reasonable fiat.
But reasonable value, in the
This is because the
10.
Cf. Robert L. Hale, ‘What Is a Confiscatory
Rate?”, Colonial Law Review, xxxv, 1046, 1052 (1935); Edw. S. Corwin,
The Twilight of the Supreme Court (1934).
11. There is an evolutionary principle within the
Anglo-American common-law idea of willingness corresponding to the evolution
of sovereignty from the time of William the Conqueror.
The idea started in warlike and feudal
times when only the wills of martial heroes were deemed worth while; then was
extended to unwarlike merchants in the law of the market overt; then to serfs
and peasants; then to the most timid of people, for whom not only actual
violence or trial by battle, but even the merest subjective apprehensions of
inferiority created fear which deprived them of their freedom of will.
(Galusha v. Sherman, 105
Wis. 263, 1900.) Then towards the end
of the nineteenth century this simplified formula of a free will was extended
to the relations between employers and employees, on the economic assumption
that employers, being owners of property, were in a stronger economic position
than propertyless laborers, such that laborers were deprived by fear of
unemployment of their freedom of will in bargaining.
(Rolden v. Hardy, 169
U.S. 366, 1898.) Further variations
were partly allowed where women and children were deemed economically unequal
to the superior managers, merchants, lawyers, or employers; so that the
agreements which they made respecting the price of labor were not contracts
between willing buyers and willing sellers. Many
other complexities arise with the incoming of large-scale production,
collective action, and the cycles of prosperity and depression; and these also
are among the variabilities that must be taken into account in the
evolutionary application of the basic principle of the willing buyer and
willing seller.
A recent writer (O. Lange, in The Review of
Economic Studies, June, 1935) holds that economic theory does not have
within itself a principle of evolution, and must follow Karl Marx in a theory
of historical materialism in order to derive a theory of economic evolution.
But I reduce Marx to a theory of
efficiency measured by man hours as an essential part of economic theory,
although usually measured by dollars. And
I find economic evolution in the changes in custom, the changes in
citizenship, the changes in sovereignty, as well as in technological changes.
Lange includes, in his meaning of
technique, changes in “organization,” which, with me are changes in
institutions. The evolutionary
principle in the common law comes under
This evolutionary principle is possible because
lawful economics is itself highly variable though founded, in Anglo-American
common law, on the willing-buyer-seller assumption.
Not only does it have the
variabilities of corporeal, incorporeal, and intangible property, and the
variabilities of reasonable and unreasonable values, but also the
revolutionary variabilities of communism, fascism, nazism and the gold clause
decisions.
245
branches, in the one direction, and the federal
and state branches, in the other direction. Yet
since the year 1890 12 the Supreme Court has held that,
while in many matters the states are sovereign, yet in the one matter of
economic valuations and activities the Supreme Court of the United States is
sovereign over both the states and the executive and legislative branches of
the federal government. In railway
valuations, for example, the Court has deprived the states of their
sovereignty. But even where the Court
asserts state sovereignty, as in the NIRA decision, the economic acts of state
sovereignty are subordinated to national sovereignty under the dominion of the
Supreme Court of the
This should be named a nationalistic theory of economics, instead of individualistic, cosmopolitan, or communistic. It parallels the trend toward nationalism the world over during the past fifty years, especially since the World War. This nationalistic theory of value, under the sovereignty in
The supreme organized collective action is the
monopoly of physical force by taking violence out of private hands.
This is sovereignty.
There are subordinate forms of
organized collective action, sanctioned by the physical force of sovereignty
but authorized, in the case of business corporations, to use the economic
sanctions of scarcity, or, in the case of churches or clubs, to use the merely
moral sanctions of collective opinion. These
subordinate forms are delegated forms, since they are created, permitted,
regulated, dissolved, or prohibited by the supreme institution, sovereignty.
I date the modern recognition by the state of
these delegated forms of economic collective action from the time of the
general corporation laws beginning in the decade of the 1850’s, and I consider
this period to be
12. C. M. & St. P. Ry. Co. v.
246
the beginning of modern capitalism.
These corporation laws endowed
individuals with a new universal right, the right of collective action,
previously outlawed as conspiracy, and not previously granted as universal but
granted only as a monopolistic special privilege by a special act of the
legislature. This new universal
right of collective action was evidently called for by the incoming of modern
widespread markets and corporation financing.
Today, it is estimated, nearly 90 per cent of manufactured products in
this country are produced by corporations.
13 In
agriculture there is authorized by the state an amazing extension of
co-operative associations controlling more or less certain economic activities
of individual farmers. The extent of
judicial authorization of trade unions in their control of individuals is well
known. Even the individual banking
business is more or less controlled by the collective action of the member
banks of the Federal Reserve system, subject to the Supreme Court.
With the incoming of these collective controls
the older individualistic economics becomes obsolete or, rather, subordinated
to institutional economics. The free
trade individual of Adam Smith and Jeremy Bentham disappears in exactly what
they denounced; namely, protective tariffs, state subsidies, corporations,
unions, co-operatives - all in restraint of individual free trade.
14
13. By the National Industrial Conference Board,
report on Federal Corporation Income Tax, Vol. I, pp. 23, 126 (1928).
14. A fiction is introduced by personifying
corporations as individuals and giving to them not only the economic rights,
liberties, and responsibilities previously attributed to individuals, but also
the additional sovereign rights and liberties of collective action, limited
liability, and so-called immortality. They
are not individuals - they are organized collective action in control of
individuals. This personification of
collective action ends in the inequality of treating as equals a concerted
thousand or hundred thousand stockholders and bankers, acting together as a
single person, in dealings with wage earners or farmers or other buyers or
sellers, who act separately in their naked individualism of Smith, Bentham,
Ricardo, the Austrian economists, the Declaration of Independence.
The statement of this fiction is found in the
case of
All economic theories distinguish between
activity and the objects created by that activity.
A familiar instance is “production”
and “product.” So with institutional
economics. The distinction can be
fixed by the terms “institution” and “institute.”
The institution is collective action
in control of individual action. The
institutes are the products of that control. What
are usually named institutions are more accurately named institutes.
The institutes are the rights, duties,
liberties, even the exposures to the liberty of others, as well as the long
economic list of credits, debts, property, goodwill, legal tender,
corporations, and so on. Even the
individual of economic theory is not the natural individual of biology and
psychology; he is that artificial bundle of institutes known as a legal
person, or citizen. He is made such by
sovereignty which grants to him the rights and liberties to buy and sell,
borrow and lend, hire and hire out, work and not work, on his own free will.
[Merely
as an individual of classical and hedonistic theory he is a factor of
production and consumption like a cow or slave.
Economic theory should make him a
citizen, or member of the institution under whose rules he acts.
This distinction between institutions and
institutes will, perhaps, account for a criticism of my Institutional
Economics, by P. F. Brissenden in The Nation,
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If we reduce organized collective action to its simplest possible formula, we have three parties to the transaction; namely, a plaintiff, a defendant, and a judge. This is indeed the simplest formula of sovereignty itself
. 15 A similar formula applies to all subordinate organizations. The three parties are clearly separated in commercial arbitration, labor arbitration, and by means of the discipline committee of a stock exchange or a produce exchange. But the judicial function is more or less merged with the executive and legislative functions in a corporation or a dictatorship.This judicial sovereignty over economic affairs in the
It is from this later meaning of due process of
law that the economic term “reasonable value” finds its place in American
economics. Reasonable value is
welfare economics as conceived by the Supreme Court.
For these reasons there is in American economics
a written Constitution and an unwritten constitution.
The written Constitution was written
in 1787 and in succeeding amendments. The
unwritten constitution was written piecemeal by the Supreme Court in deciding
conflicts of interest between plaintiffs and defendants.
We live under this unwritten
constitution; we do not even know what the written Constitution means until
the Supreme Court
15.
Cf. Hans Kelsen,
Allgemeine Staatslehre (1925).
16. Edw. S. Corwin, The Constitution and What
it Means To-Day, 105 (4th ed., 1930); Commons, Legal Foundations of
Capitalism, pp. 333ff. (1924); see especially majority and minority
opinions in Hurtado v.
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decides a case. When we investigate reasonable value we are investigating the unwritten constitution. When we investigate the evolution of reasonable value we are investigating the Court’s changes in meanings of such fundamental economic terms as property, liberty, person, money, due process. Each change in meaning is a judicial amendment to the Constitution. 17
Thus, while the early economists, from Thomas
Aquinas to John Locke, Adam Smith and David Ricardo, culminating awkwardly in
Karl Marx, eliminated money and prices but made labor cost the measure of
value, the institutional economics of the common law and the Supreme Court
makes legal tender money and the free will of buyers and sellers the measure
and standard of reasonable value.
17.
This is the predicament in teaching the
Constitution to children in the public schools and in meeting the repeated
demand that we “go back to the Constitution.”
We cannot go back to the written Constitution.
We go back to the unwritten
constitution. In the case of the
institutional economics of reasonable value we go back to the common-law
assumption, and its later evolution, of a willing buyer and a willing seller.
This is the simplified economic assumption of the unwritten
constitution. There are other sources
of the unwritten constitution, but I am speaking here of economic valuations
by public authorities which the Supreme Court has said are a judicial
question. See W. B. Munro, The
Makers of the Unwritten Constitution (1930) ; C. E. Merriam, The
Written Constitution and the Unwritten Attitude (1931); R. L. Mott, Due
Process of Law (1926); E. S. Corwin, The Constitution and What It Means
To-Day (4th ed., 1930).
The gold clause decisions were a revolutionary
change in the unwritten constitution as previously decided in the legal tender
cases. They changed the meanings of
“obligation of contracts” and of value, by transferring from creditors to
debtors millions of dollars which had been willingly agreed upon at the time
when the debts were contracted. But
similar judicial revolutions have occurred in the meanings of other words in
the unwritten constitution.
It is upon the ground of the primary assumption
of willing buyer and willing seller in the unwritten constitution that I argue
for a mandate of Congress for a reasonable stabilization of prices as far as
practicable by the Federal Reserve system. The
gold clause decisions are an evolution from the legal tender cases.
They leave no fixed weight of gold as
the measure of value. They assert the
validity of legal tender paper throughout the nation as fulfilling the
constitutional obligations of contract. The
stabilization of legal tender prices is the stabilization of creditor-debtor
relations. If such a law were enacted
by Congress its constitutionality, as construed by the Court, would be a
further evolution of the unwritten constitution.
This bears on the debated point of judge-made
law. The judges do not actually make
law. They decide particular disputes.
Then it is expected that they will
decide similar disputes in a similar way, and so, what is the use of bringing
up the same point again? This is not
so much the way in which law is made as it is the way in which custom is made.
A description of the evolution of
custom, in Anglo-American law, is the change in habits due to change in
expectations of what the courts will do in deciding conflicts of interest.
This is more appropriately named
judge-made custom instead of judge-made law.
In
249