Skip to main content

Efficiency and Scarcity in Institutional Economics

In chapter seven of Institutional Economics, Commons writes about the related issues of efficiency and scarcity.  He is writing because of his great concern over the confusion of wealth and its double meaning.  The first meaning of wealth he defines as the issue of maximizing the production or productive value of assets.  This production is done by engineers and scientists irregardless of the price system or price signals.  He discusses that this first notion of wealth relates to human control over nature.  As we get better at production via technology and ideas, we expand our control over nature.  The engineering economy is based on inputs and outputs and maximizing the one relative to the other.  He focuses on man hour inputs versus use value outputs.  Wealth is defined as the creation of goods and services with use value.  He also fully explain the need to skip dollar values as the measuring stick in the engineering economy.

The second meaning of wealth he redefines as assets.  Here we are talking about one persons control over another person in the marketplace.  This is the proprietary economy of bargaining transactions.  In this view, the goal is to have or create scarcity to maximize profits and not production.  This is the economy of the business person or entreprenuer.  Here, income is the measuring stick and the difference between dollar based income and outgo.  A key question is the distribution of the net income to the various parties to the going concern.

Commons goes to great pains and close to one hundred pages making this distinction and clarifying this dual meaning of wealth.   The reason for this lengthly narrative is because he believes that this confusion has lead many schools of economics astray since the 1790's.  Ultimately, he will also argue that this confusion leads to poor policy advice.

Comments

Popular posts from this blog

Commons Futurity pg.526-528

Commons Futurity VII. The Margin for Profit pg 526-528  In this section, Commons turns to thinking about a specific aspect of modern banker capitalism addressing the question of profit's role in the economy. He starts with some terminology regarding profit share - the share of national income that goes to profit earners and the profit margin - the dynamic aspect that drives a going concern forward. We then move into another set of terms that are rate of profit and profit yield.  The rate of profit is related to the par value of stock and yield is related to market value of stock or outstanding equity. The social question to Commons is what the role of profit in keeping the overall economy and does society or community pay too much or too little for this service. Economists have long thought about the role of profits in driving the economy up or down.  Commons believes there are profit share theories and profit margin theories as two diction categories in economic thinking...

Commons Futurity pg. 510-526 VI. The Transactional System of Money and Value

VI. The Transactional System of Money and Value  The overall objective of this section is to understand money and its role and relationship to economic value in the institutional economics of John R. Commons. Commons writes that, "It is because Value is a two-dimensional concept (omitting futurity)—with two different causations, the one being the scarcity-value, or price, determined by supply and demand, the other being the greater or smaller output of use-value which will be created in the labor process that follows the transaction. " (Commons, pg. 517, 1934). The point here is again Commons is fighting against what he observes are the limits of other definitions of economic value such as simply individual utility or the classical case of exchange value only.   In this section, Commons make an important move on pages 520 and 521. He states that for a thing to be objective it needs to be independent of any objective will as opposed to other competing definitions. He will ...

Commons commenting on Marx and Proudhoun

Commons provides a short discussion to contrast Karl Marx (communism) and Pierre Joseph Proudhon (anarchism) in Institutional Economics.  His point in writing about these two authors is to continue to flesh out the idea of theory of efficiency versus an economic theory of value. This is section eight in the chapter of efficiency and scarcity pages 366 to 378.  Commons wants us to understand that Ricardo and later Marx led us to a theory of efficiency and not a theory of value.  This is not in itself a negative as a theory of efficiency is important to Commons. However, Commons wants us to understand that a theory of efficiency as espoused by Ricardo and Marx is only half the story of a theory of value.  Marx is the real part of the story in this section with some attention paid to Proudhon. As usual, Commons points out both the advanced and faults in the various thinkers he is addressing. Marx, Commons writes, did improve on Ricardo and others by replacing a subjec...