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Habitual Assumptions in "Institutional Economics"

Habitual Assumptions

Habitual assumptions are an important component of the reasonable value model that Commons is trying to build. It is focused in section V of the Reasonable Value chapter of Institutional Economics from pages 697 to 719 and the idea appears later in different parts of that chapter as well.

Habitual assumptions was defined by Commons as "when one has acquired ways of looking at things when making one's decisions, choosing ones alternatives and dealing with others in ones transactions" (pg. 697).  Commons cites favorably in this section a book by E. Jordan called "Forms of Individuality".  Jordan talks about the "institutionalized mind".  This means how a persons mind is shaped by the customs and traditions of the place or "going concern"that they are embedded in.  Thus, Commons has introduced the terms habitual assumptions and institionalized mind. 

In terms of analytical approaches, Commons writes that, "social science investigates habitual and customary assumptions as an explanation of transactions.  Here we see Commons making an explicit hypothesis regarding the performance of transactions and what the social scientist should be seeking out.  This is again in contrast to the many critics who claim it was only description without analysis.

Commons classifies habitual assumptions as: 1) technological, 2) proprietary and 3) ethical.  Technological are those based on engineering economics and the transformation of use values.  Proprietary are those regarding the ownership and transference of economic units.  Finally, ethical assumptions regard how we decide when they are conflicts of interest.

Commons takes this habitual assumption concept and extends it one point further by distinguishing how the mind works between strategic (limiting ) factors and routine(complementary) factors.  The mind is split between acting in a routine fashion as an "institutionalized mind" and then at other times being brought to bear on harder and strategic issues in an intellectual context.  Commons talks a bit later on page 698 about "they pay no attention to them except when some limiting factor emerges and goes contrary to what they were habitually expecting". This is very similar to what others are talking about in new theories of psychology and behavioral economics (see Daniel Kaheneman's book "Thinking Fast and Slow" for example).  Commons did more thinking and writing about the underlying psychology of the actors in his system then he is often given credit for by today's critics.

Inducements

Inducements are those mechanisms through which individuals are made to act in conformity with the collective will or the habitual assumptions necessary to keep the going concern active.  Again, context is important here.  Commons viewed the individuals in his system as being "the uncertain wills of individuals looking towards the future in their transactions and modes of living".  In essence, we are all jostling with each other in a world of scarcity looking forward to the outcomes of the transactions we are engaging in. We use habitual assumptions and the accompanying inducements and sanctions to ensure the system is able to keep moving forward.  Often, these assumptions and inducements are not even noticed until a change occurs.

Working Rules

Commons ends the section with the notion of "working rules" to summarize of the various customs, statues, laws precedents and habitual assumptions upon which we act.  In this sense, working rules are the key to what drives performance in transactions of all types.

With any set of habitual assumptions, there will be disputes or conflicts between parties.  In settling a dispute, Commons argues that some type of authority or enforcer is needed to settle conflict.  This authority must settle on who has a right who has a duty.  A right-duty is correlative between the two in a conflict.  Commons again emphasizes the relationship between the two parties using Hohfeld's right-duty lingo that he first developed in Legal foundations book. The settling of conflict in this manner leads to a change in the working rules.  commons compares to the legal method of common law that has developed in the United States and Europe and contrasts this with the Napoleonic method of law and reference to codes where common law is not applicable.

Summary

The key concepts of institutionalized mind, habitual assumptions and finally working rules were developed in this part of Commons book Institutional Economics.  Despite some modern criticisms, in fact, Commons had developed some important ideas about his individual psychology that underlie his theory.  also, despite criticism that it was mere description, commons has developed a theory that links a set of independent variables in the form of working rules (habitual assumptions) to a dependent variable which is economic performance in a transaction.  While perhaps not fully fleshed out in a modern sense, the basic conceptual scaffolding is there.

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