Section (10) from psychological economics to institutional economics
This section lays out Commons views on whether we need to evolve from the psychological school or hedonistic school of economics that had become important in the 19th century and early 20th century. The basic outline is that Commons believes that the psychological school provides some important insights but is based on a non-exchange economy.
Commons view on psychological or hedonistic economics is that its plays an important role in our understanding human consumption and even home production but only where there is no exchange involved.The psychological school doesn't focus on social conflict as institutional economics. In this case you need an understanding of conflict and scarcity and ownership. Commons also points out that we need an objective unit of measurement for exchange and courts or systems of arbitration to address conflicts over transactions.
The other major point that Commons wants to think about is physical commodities - which in his mind is the focus of psychological economics versus institutional economics which focuses on economic quantities. At one point Commons talks about economic quantities - tangible and intangible items that are bought and sold for future use (Macleod). An economic quantity is not a physical thing in fact, it is a “power or force”. This means in fact that these transactions are occurring with an eye to the future and the economic quantities are exerting social force and driving change in society.
The economic qualities are measured by present and future capital value in the modern sense of them. The present value is based on cash and bank deposits. The stocks and bonds and other forms of credit are future money or capital value.
In this section, Commons makes one of his most powerful statements about how the modern economy works. He writes that, “This modern meaning of capital, as an economic quantity measured by money is both very powerful and very sensitive. Capital has solely a legal foundation and may disappear wholly if that foundation is revolutionized. The magnitude of capital reflects every change or fear of change in world economics. Yet this economic quantity is more powerful than governments. It sets labor to work or out of work. It pays debts and taxes. It makes wars.” He makes the clear statement that capital can be altered and changed by human action and will be very sensitive especially to legal changes. He also makes a point which many would echo today that money or economic quantity is more powerful than many going concerns including the governments that issue the money.
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