Abstract
The micro-macro dichotomy is a settled habit of thought common to most economists. As a result, economists are, on the one hand, locked in the dichotomous reasoning by virtue of ones successful training. On the other hand, an attempt to reconcile micro and macro is assumed to be futile. In contrast to such a conventional wisdom, Thorstein Veblen offers a micro-macro synthetic approach to economy and society. This paper examines Veblens approach vis-à-vis neoclassical microfoundations and neo-Schumpeterian micro-meso-macro approach. The main argument is that micro-reductionism is irrelevant and mathematical formulations are critically limited tools for explaining the causal evolutionary process.
The micro-macro dichotomy is a conventional wisdom in economics. Its origin is attributed to the predominance of the neoclassical1 synthesis which relies exclusively on the individual decision making mechanism. As the hegemony of economics is held in the hands of neoclassical economists, the micro-macro dichotomy gets its superior status over other ways of conceptualizing the real world. The dichotomy is, in Thorstein Veblen’s words, now the settled habit of thought common to economists in general, which is to say, economists are, one way or another, locked in the dichotomous reasoning by virtue of one’s successful training. Heretic theories and ideas that are not conforming to the dichotomy are either unconsciously ignored or consciously vulgarized since they more often than not challenge the status quo and vested interests (Henry 1990, 243). The conventionalized habit of thought, at any rate, permits less and less creative and critical inquiry.
Such a Veblenian point of view also implies that the current state of economic reasoning is temporary in light of the long history of economics. The prospect of the eventual demise of neoclassical orthodoxy can be found in that paradigm itself. A strong tendency for the perpetuation of the neoclassical economics within academia lends itself to the ‘self-righteousness’ and the ‘self-restriction’ from the changing socio-economic environment (Galbraith 1979, 354). The consequence is likely to be the prevalence of theory for the sake of the theory.
The thesis of the present paper is that the micro-macro synthesis found in Thorstein Veblen’s Institutional economics2 provides a guiding light for the challenge against the conventional wisdom. To identify and emphasize the power of Veblen’s synthesis, its methodological commitments are discussed in contrast to other synthetic approaches. Among others, I focus on the Neo-Schumpeterian micro-meso-macro approach which has been occasionally claimed to be consistent with Veblenian Institutional economics. Finally, Veblen’s position on mathematical formalism is examined in terms of his synthetic approach.
Prior to John Maynard Keynes’s General Theory the distinction between micro and macro was not firmly established.3 Even founding fathers of neoclassical economics did pay attention to the link between individual and society, albeit individualism (and individual’s hedonistic utility) is the starting and the focal point. Léon Walras, for example, wrote three volumes on ‘social’ wealth—Elements of Pure Economics, or the Theory of Social Wealth (1874), Theory of the Division of Social Wealth (1896), and Theory of the Production of Social Wealth (1898)—in which the competitive capitalist system was defended. Apparently Walras was hoping that the system based upon self-interested competition would generate the optimal, if not just, outcome for the society as a whole (Henry 1990, 210). Similarly, Marshall puts an emphasis on individuals in the larger social context. In Principles of Economics, Marshall puts it:
Perhaps the earlier English economists confined their attention too much to the motives of individual action. But in fact economists, like all other students of social science, are concerned with individuals chiefly as members of the social organism …economists study the actions of individuals, but study them in relation to social rather than individual life; and therefore concern themselves but little with personal peculiarities of temper and character (1961 [1890], 25).
John R. Hicks (1937) combined vulgarized Keynes’s macroeconomics4 with the Walrasian general equilibrium framework, which led to the neoclassical synthesis. The synthesis, however, was deux ex machina in the sense that ‘Marshall’s puzzles’5 remained unsolved. Whether neoclassical synthesizers were conscious or unconscious, the strict micro-macro dichotomy was of necessity in doing neoclassical economic analysis. Neoclassical microeconomists, on the one hand, habitually clung to individual optimization and partial equilibrium—normality—assuming that economic conditions are stable and unchanging (that is, the ceteris paribus assumption). On the other hand, neoclassical macroeconomists were concerned exclusively with economic abnormality (for instance, inflation and unemployment) assuming that every individual entity is homogeneous regardless of time and space. The inconsistency and the incompatibility between micro- and macro-analysis were hidden temporarily with growing the seed of further discontent.
In following decades, the evolution of modern neoclassical macroeconomics, beginning with Monetarism and, later, New Classical and New Keynesian schools, marginalized Keynes’s macroeconomics. This, indeed, is the unavoidable consequence of the neoclassical synthesis because not only Keynesian macro theory is inconsistent with neo-Walrasian micro theory, but also neoclassical economists have a difficulty of empirically validating and mathematically articulating the macro events like prolonged unemployment (Howit 1987). To make neoclassical economics sensible and consistent, if not relevant to the real world, they needed the microfoundations of macroeconomics. In doing so, micro-reductionism was necessary as well. Not to mention, microfoundations and micro-reductionism perfectly fit in with methodological individualism. As a result, the individual optimization method is directly applicable to aggregate economic events by assuming the representative agent.
As such, the intellectual history of neoclassical economics tells us that the contemporary state of neoclassical economics is foreshadowed by its predecessors. The micro-macro dichotomy and ensuing microfoundations (or micro-reductionism) became the dominant habit of thought which upholds the neoclassical orthodoxy. The longer view of history, of course, would help to better understand the nature of neoclassical economics.6 For reasons of space, I am not willing to go into great detail. But let me just briefly point out the philosophical and methodological foundations that are relevant to the current discussion.
In terms of philosophy and methodology, the micro-macro dichotomy, microfoundations, micro-reductionism, and formalism within neoclassical economics are the outcomes of centuries-long utilitarian-marginalist-Newtonian tradition. As a matter of fact, acute discussions on the philosophical root of neoclassical economics are well documented by many writers. Just to mention the most important figures, Veblen (1898a, 1909) contrasts his ‘post-Dawinian’ evolutionary economics with utilitarian, hedonistic, and the teleological nature of classical and neoclassical economics. Similarly, Keynes (1926) finds the origin of laissez-faire neoclassical economics from David Hume’s individualism, Jeremy Bentham’s utilitarian hedonism, and Herbert Spencer’s social Darwinism. The influence of Cartesian/Euclidian or Newtonian mode of thought—physical, mechanical, and reductionist—on classical and neoclassical economics is well articulated by Dow (1985b) and Galbraith (1994). Regarding the Cartesian/Euclidian mode of thought, Sheila Dow puts it:
The method involves establishing basic axioms, which are either true by definition or ‘self-evident’, and using deductive logic to derive theorems, which are not self-evident. It is, however, only in mathematics that it is possible to establish incontestable axioms, because mathematics alone is a definitional system which can be pursued totally independently of observations of reality. (1985b, 12)
In a nutshell, the dichotomized view led to the unstable marriage of Walrasian microeconomics and Keynesian macroeconomics between 1940s to 1960s. Since then, microfoundations and micro-reductionism have been conventionalized in order to legitimize the micro-macro dichotomy. One significant consequence is that neoclassical economics gets increasingly aloof from the social reality which is ever changing. This is another problematic dichotomy between theory and reality. Beginning with untestable axioms on individuals, neoclassical economists develop a theory independent of society and social relations. Society, as an impediment to the theoretical conclusion, is introduced, if necessary. Frank Knight, for example, proclaims that:
I do not see how we can talk sense about economics without considering the economic behavior of an isolated individual. Only in that way can we expect to get rid by abstraction of all the social relationship. (1960, 71)
The conception of individual and society contained herein implies that neoclassical economics is, using Veblen’s terminology, the ‘taxonomy for taxonomy’s sake’, which serves only for the vested interest of the ruling class (Veblen 1898a; Henry 1990; Tilman 1996, 32; Rutherford 2001, 174) by hiding the reality which is preceding to the conception of it. The vested interest in its nature tends to protect the vested right of property and the vested power over the ruled. It thus is necessary for the ruling class to hide embedded power relations by propagating free market ideology. That is, markets are, as a rule, self-adjusting and perfectly competitive. The reality that capitalist markets are managed and controlled to protect capitalists’ own interests is rarely seen in conventional economics textbooks. The managed belief in the law of supply and demand does not allow laymen to take into account unequal power relations between sellers and buyers. In a similar vein, the habituation of neoclassical reasoning does not allow younger economists to think outside the conventional wisdom. Simply speaking, “[w]hat man can do easily is what they do habitually, and this decides what they can think and know easily” (Veblen 1898b, 195). So, the established institution of neoclassical economics stays dominant as long as the received habits of thought are supportive of and promoted by the vested interest. This further implies that neoclassical economics has never been free from the dominant ideology (Henry 1990).
All the more, by virtue of more sophisticated mathematical and econometric tools, the tendency of distancing theory from the reality gets amplified. In neoclassical models, unquantifiable structures and mechanisms such as the formation of individual preferences and a particular behavioral pattern, emergent social structures (institutions, rules, and culture), the open-ended consequence of interactions and relations, and the evolution of institutions can/should not be taken into account. Otherwise, it would be a threat to the status quo since the deeper understanding of structures and causal mechanisms tends to emancipate people from the received ideology and, hence, the vested interest. Formal models, on the contrary, simplify and idealize the complex reality as if society is coordinated by natural and mechanical laws which lead to the a priori equilibrium state. Hence formal models make people believe what fancy economic models describe amounts to what actually happens in the real world. Further arguments on formalism in contrast to Veblen’s view will be discussed later.
In sum, the evolution of neoclassical economics is degenerative in the sense that it is in the process of eliminating its relevance in order to maintain vested interests and the status quo. Historically, neoclassical economics presents homeostasis at the philosophical level (viz., sticking to core premises and belief) and, simultaneously, transistasis at the methodological level (viz., refining mathematical tools). At any rate, neoclassical economics is changing at least at the surface level. Change, however, does not necessarily mean progress.
Veblen’s Institutionalism stands in stark contrast to neoclassical economics. While the latter is in its nature “physical, pecuniary, ahistoric, natural, normal, perfect, ideal and rigidly deterministic process” (O’Hara 1992, 72), the former is cultural, complex, social, historical, realistic, emergent (anti-reductionist), open-ended, path-dependent, dynamic, phylogenetic (population perspective), and evolutionary (Hodgson 2004, 95-97, 246-247; Mayhew 1998; Mearman 2002; Veblen 1898a; 1909; 1961[1908], 32-55). As a corollary to this, Veblen’s Institutionalism is necessarily interdisciplinary; philosophy, history, sociology, psychology, anthropology, biology, and economics are moulded, at various degrees, into a substantive body of evolutionary science (Mayhew 1998, 455; Tilman 1996, 30). Since we are particularly concerned with Veblen’s micro-macro synthetic approach, I raise the following questions for the sake of discussion: What is the conceptual basis of Veblen’s synthetic approach? How does Veblen analyze the evolutionary process? Is any sort of reductionism possible in the Veblenian approach? In due course we shall deal with these questions.
The fundamental distinction between Veblen’s Institutionalism and neoclassical economics lies in the conception of society and agency. At the center of Veblen’s analysis there is an inextricably connected agency and society by way of the formation and the evolution of institutions. Institutions are emergent social structures co-existing with habits of thoughts of the population. Thus institutions are irreducible to individual instincts, aspirations, sentiments, and choices. More importantly, institutions and agency are interactive over time in a cumulative manner.
For Veblen, agency is not simple-minded homo economicus,7 but social animal. Agents have not only socially inherited instincts, but also acquired knowledge, skill, and habits by way of socialization. As the usual usage of the term implies, instincts are hereditary. But a caution should be exercised in grasping Veblen’s conception of instincts. In the context of Veblenian institutional economics, instincts are social and cultural rather than biological. In the everyday life of a human being, instincts drive an individual action toward an object set up beforehand (Veblen 1914) in the sense that “instincts provide a set of original, or basic, goals of action, but people must work out the ways and the means of achieving these objectives within the environmental conditions that they have” (Rutherford 1998, 467). Therefore, an instinctive action is purposeful or teleological, but not as biological or tropismatic as Pavlov’s dog which immediately reacts to his master’s bell. As Veblen sets forth below, the concept of instincts is indispensable to the account of institutions.
A genetic inquiry into institutions will address itself to the growth of habits and conventions, as conditioned by the material environment and by the innate and persistent propensities of human nature; and for these propensities, as they take effect in the give and take of cultural growth, no better designation than the time-worn “instinct” is available. (Veblen 1914, 2-3)
The upshot is that individual action is governed by both instincts and social environment. The formation of habits of thought common to the general population is not simply the aggregation of individual habits. It involves existing social structures (for example, class distinction, the mode of production and distribution, the political orientation of the State), culture or social environment (for example, vested interests, a dominant ideology, convention, norms, socialization, social sanction). The resulting institutions at the macro level are either intended or unintended consequences of individual actions. The causal relation does not stop here. The prevalent culture (the system of institutions) confines individual actions in the form of “conventional standards, ideals, and cannons of conduct” in the process of the formation of individual habits, skills, and knowledge (Veblen 1909, 629).
Such an evolutionary process with which Veblen was most concerned is thus complex, cumulative, path-dependent, and open. More pertinently to the current discussion, Veblen’s evolutionary science has nothing to do with the micro-macro dichotomized approach. For example, Veblen’s theory of competition is not a micro theory (Baskoy 2003). By the same token, Veblen’s business cycle theory is not solely a macroeconomic analysis either. This is not to say that Veblen’s theory of business cycle is non-macro, but to say that micro- and macro-analysis must be integrated into an Institutional economic analysis. All the more, the conventional micro-macro approach would not fully grasp Veblen’s insights, since there are non-economic accounts such as philosophical, historical, sociological, psychological, and anthropological analyses.
In terms of the micro-macro synthesis, more attention should be paid to the central importance of active agency in the Veblenian context. Indeed, Veblen repeatedly proclaims that Institutional economics “must deal with individual conduct and must formulate its theoretical results in terms of individual conduct” (Veblen 1909, 629) and “[e]conomic action must be subject matter of the science if the science is to fall into the line as an evolutionary science” (Veblen 1898a, 388). A neoclassical economist preoccupied with methodological individualism may interpret Veblen’s emphasis on ‘individual’ conduct as the legitimation of microfoundations of macroeconomics. Yet, this is not the case. The neoclassical economic process is based upon passive and hedonistic agents conforming to given external conditions. As is presented above, however, the evolutionary process set forth by Veblen is the result of interactions between active human beings and evolving institutions. In this very respect Veblen distinguishes his own theory and neoclassical theory:8
[A]n adequate theory of economic conduct, even for statical purposes, cannot be drawn in terms of the individual simply—as is the case with the marginal-utility economics—because it cannot be drawn in terms of the underlying traits of human nature simply; since the response that goes to make up human conduct takes place under institutional norms and only under stimuli that have an institutional bearing; for the situation that provokes and inhibits action in any given case is itself in great part of institutional, cultural derivation. Then, too, the phenomena of human life occur only as phenomena of the life of a group or community …The wants and desires, the end and aim, the ways and means, the amplitude and drift of the individual’s conduct are functions of an institutional variable that is of a higher complex and wholly unstable character. (Velen 1909, 629)
With regard to the interactions between agency and institutions, we should be careful of two points. First, human agency is composed of socially inherited instincts and acquired knowledge, skills, and habits. These two intertwined facets lead to a certain pattern of individual conduct. However, in doing things individuals are confined by existing structure and environment. A novel technical knowledge devised by engineers, for example, does not necessarily take effect unless the hierarchical enterprise structure permits it. Hence, innovation is not the immediate consequence of a novel knowledge either. Second, an individual action does not necessarily end up with an intended institution. To become common to the population of the society, the action (or idea) should be consonant with the existing institution (conventions, norms, and the vested interest) first. Otherwise, a new action is segregated and marginalized insofar as it offends the vested interests of the ruling class. That is why institution tends to stabilize itself and why individual actions and ideas are embedded in the social relation.
In the complex and open evolutionary process, therefore, the free transition between micro and macro is not possible. The linear linkage between cause and effect should be avoided as well. In addition, micro-reductionism is irrelevant. In this context, it is Veblen’s active human agency that makes the system open and going. But it is not the individual’s optimal decision nor the growth of knowledge per se but the evolution of institutions that contributes to the evolution of the society. In turn, “capacity of growth in social structure”, Veblen sets forward, “depends in great measure on the degree of freedom with which the situation at any given time acts on the individual members of the community—the degree of exposure of the individual members to the constraining forces of the environment” (1899, 193). So, the dynamics of agency, institutions, culture, and social structure is indeterminate and complicated. As a consequence, Veblen’s economics does not lend itself easily to popular treatment within economics scholarship since it challenges the conventional wisdom and vested interests.
Outside the neoclassical program, many efforts have been exercised to synthesize micro and macro. An intriguing one is the micro-meso-macro approach (MMM, hereafter) being developed by Neo-Schumpeterians. I take it critically from a Veblenian perspective in that though similarities between two approaches are apparent, there exist fundamental differences which should be clarified for the purpose of constructive discussions. Thus a critical examination of MMM will render Veblen’s synthesis clearer and distinctive.
Since the work of Richard Nelson and Sidney Winter (1982), Joseph Schumpeter’s evolutionary economics has been increasingly popular in the economics discipline (Freeman 2004; Dopfer 2006; Hanusch and Pyka 2007), independently of Veblen’s evolutionary economics. It is proposed that evolutionary economics provides an alternative approach to neoclassical economic theory in that Schumpeter’s notion of innovation is the primary driving force in the growth of economy. Since innovation emerges out of entrepreneur’s profit motives, technological knowledge, and psychology, the outcome (e.g., economic growth) is endogenous by contrast to the canonical neoclassical theory of growth. This also involves heterogeneous individuals, bounded rationality, uncertainty, and path-dependence (history) (Nelson and Winter 2002; Hanusch and Pyka 2007). In addition to the Schumpeterian tradition, evolutionary economics entails Hayekian (or Austrian) subjectivism in that knowledge plays a significant role in the change in economic structure (Dopfer 2006).
Following such traditions, some evolutionary economists have developed the MMM framework putting the meso-domain composed of knowledge, rules, routines, and the network of them at the center stage. MMM is in its character evolutionary, complex, dynamic, heterogeneous, structured, systemic, open, path-dependent, behavioral, and interdisciplinary (that is, biology, psychology, and sociology). Subsequently and necessarily, MMM involves a complex adaptive systems method to deal with the evolutionary change in the social reality in a more rigorous fashion (Brette and Mehier 2005; Castellacci 2006; Dopfer 2006; Dopfer, Foster, and Postts 2004; Dopfer and Potts 2004; Foster 2005; 2006; Foster and Potts 2007; Nelson and Winter 1982; 2002; Hanusch and Pyka 2007).
In the light of MMM, the socio-economic evolution is the process of origination, diffusion, and retention of the meso-trajectory. A new knowledge (innovation) created by an individual spreads over others. Following the selection and rejection process, an adequate knowledge is retained and shared as a new institution among population. The adoption of a new institution generates elaboration, refinement, or transformation of the system with a varying degree (Brette and Mehier 2005; Dopfer, Foster, and Potts 2004). Apparently, in the MMM context, the micro is an individual (an entrepreneur or a firm), the meso is a sum of related individuals (an industry or a network), and the macro is the economy as a whole (Hanusch and Pyka 2007, 281-282). These three strata are organically intertwined. Either micro, meso, or macro analysis alone is not able to explain the comprehensive nature of the evolutionary process. The synthetic approach is hence imperative.
Hence one notable commonality between MMM and Veblen’s framework is comprehensiveness in their analysis. This is obvious because both of them are concerned about the organic evolutionary process in which neoclassical-type reductionism is to be excluded and in which emergent properties are brought to the fore. So, Neo-Schumpeterians come to believe that MMM is the way Veblen was longing for in his revolutionary article “Why is Economics Not an Evolutionary Science?” (Brette and Mehier 2005; Dopfer 2006; Foster 2006; Foster and Potts 2007).9
Indeed, the MMM framework effectively presents the intertwined and recursive connection between agency, knowledge, and institutions (rules). And conceptualizing the reality as micro-meso-macro is prima facie consonant with Veblen’s evolutionary framework. So, it is not totally faulty to claim that there is a compatibility between the MMM approach and Veblen’s synthesis. On second thought, however, there exist apparent differences between the two approaches.
First of all, for Neo-Schumpeterians “the economy is made of meso units” and thus ‘generic rules’ are to be located at the center of economic analysis (Foster and Potts 2007, 6). The concentric emphasis on the rule lends itself to the peculiar notion of agency—‘rule maker’, ‘rule-user’, and ‘rule-carrier’ (Dopfer 2004; Dopfer et al. 2004; Foster and Potts 2007). It is, hence, not the matter of actions, but the matter of rules which determine actions and which render the system complex and open. Consistently, economic evolution such as business fluctuation and the generation of value are driven by the changes in the meso-domain. Foster and Potts write:
Economic growth is the product of widely observed diffusion processes that involve meso rule connections (order) spreading across a population...Economic decline involves the onset of disconnections (disorder) in systems where the capacity to generate new processes and/or products has been exhausted. (2007, 11)
For Veblen, however, the emphasis is not put on rules nor institutions as settled rules. As we have discussed above, agency is the complex entity composed of socially defined/generated instincts, actions, knowledge, skill, and habits. Veblen in fact emphasizes the significance of agents’ insight and valuation which reside in the domain of mind (Veblen 1898a, 387-8). But he is not to say that such a mental operation is the driver of individual actions and social evolution, since there is no such thing as a direct and monotonic cause-effect relation between mind (knowledge) and action. Furthermore, a novel knowledge can be revealed right or wrong only by the practice of an action and the intellectual contact with material facts and events (Katzner 2001, 55). That is, in Morgenstern (1963)’s words, “the proof of the cake is in the eating”. The reverse does not hold. Moreover, a piece of knowledge is defined and takes its place in the context of a particular social relation, since facts and events are understood and become a common knowledge under the guidance of socially formed habits which are, in turn, the product of social norms, conventions, and ethos (Veblen 1898b, 195). The equivalence between knowledge and action may be possible only if human beings act mechanically without consciousness and in vacuum. But this is a weak condition since agency is not an asocial homo economicus.10
Another significant discrepancy not-to-be-overlooked is that Veblen’s stratified view on agency and action elucidates the generation of unintended as well as intended consequences. The former cannot be known until they actually happen. Thus the one-to-one relationship between action and outcome does not hold. This is one of fundamental characteristics of the genuine evolutionary (or historical) process. In a contrary manner, by the central role of the meso-domain, MMM implicitly postulates that the being (outcome or structure) is equal to the knowledge of it. Thus both intended and unintended consequences should (or are assumed to) be known a priori. That is to say, the being is reduced to the memory trace. Thus it is hardly possible to differentiate between the structure itself from the interpretation of it. Indeed, the latter is more important than the former in the MMM framework. Consequently, it is hard to theorize the evolutionary system as a whole in which agents and structures do not only coexist independently, but also constrain and facilitate each other over time (Archer 1995). In addition, the exclusive emphasis on knowledge also leads to the notion of ‘moving competitive equilibrium’ (Nelson and Winter 2002, 41) or ‘punctuated equilibria’ (Hanusch and Pyka 2007, 277) which can be identified in the formal evolutionary model. But the process in historical time has nothing to do with (dis)equilibrium (Henry 1984-85, 222; Robinson 1964, 76; 1974, 48). The issue of formal articulation of the evolutionary process is discussed below.
In short, the MMM approach deserves some credits for providing us with an alternative way of analyzing the economy beyond the limited neoclassical micro-macro dichotomy and microfoundations. From a Veblenian perspective, however, by putting a great emphasis on the meso-domain MMM has obvious shortcomings in explaining the genuine evolutionary process. Without doubt, for Veblen the driving force of social evolution is not knowledge but purposive actions. Knowledge is only a necessary condition for exercising actions and, hence, evolution of the system as a whole. Table 1 below summarizes Veblen’s and Neo-Schumpeterian approaches in terms of their core methodological components.
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As we have seen so far, Veblen’s economic analysis is highly complicated because of the complexity of social reality and its open evolutionary process. The micro-macro synthetic approach thus is necessary and relevant for conceptualizing and theorizing such a complex system. Rather than making his theory simple and immediately usable for practitioners’ and theoreticians’ sake, Veblen uses interdisciplinary, narrative, and qualitative methods. By doing this, Veblen provides us with emancipatory insights on the formation and the changes in our society beyond the results derived from frequently-used formal models in economics. In light of the contemporary state of economics and the vested interest, however, Veblen may be the most unwelcome thinker. This also implies that Veblen’s theory and method will never be conventionalized among economists as long as they are preoccupied with reductionism and formalism. In fact, Veblen foresaw that economic theory would become increasingly formal and quantitative (Veblen 1925).
Many contemporary economists view that the main reason for the decline of Veblenian tradition in economics is the lack of formal articulation. Even some Institutionalists (for example, Wesley Mitchell)11 and Neo-Schumpeterians, in particular, charge that the non-formal, highly speculative, and the unverifiable character of Veblen’s economics does not lend itself to the further progress of Evolutionary-Institutional economics. Therefore, many argue that to rejuvenate Veblen’s Institutionalism or the evolutionary perspective in economics we should make more use of formal methods such as game theoretic models, mathematical and econometric tools (for exmaple, simulation and calibration) (Colander 2003; Foster 2005; 2006; 2007; Foster and Potts 2007; Gibson 2008; Nelson and Winter 2002; Radzicki 2003; Prasch 2000; Villena and Villena 2004). This issue, from a Veblenian viewpoint, should be raised and discussed in detail and at large, since for Veblen mathematical formalism adds little to the true evolutionary analysis.
If we believe that the formal method is superior to the non-formal or narrative method in explaining the reality, the above claim is valid. Under such a belief, Veblen’s analysis is not serviceable for the sake of theory generation and policy suggestion. But it is an invalid claim for those who, including Veblen, view that the formal method is a fundamentally limited way of reasoning for genuine history or open evolutionary process (see, Eaton 1965; Georgescu-Roegen 1979; Rima 1994; Sugden 2001; Varoufakis 2008; Veblen 1961). Veblen unambiguously proclaims his position against mathematical formulation. That is, Veblen argues that there are two sorts of knowledge, speculative (mathematical) and scientific (causal analysis), which are under the influence of prevalent institutional setting (or predominant conventional wisdom and the vested interest). The former is logical exercise that is distant from real life experience (hence ceremonial and institutional), and the latter is workmanlike knowledge closely associated with material exigency (hence, technical and instrumental). However, mathematical formulations reflect no more than observed ‘idle quantitative concomitance’ of the reality, while cumulative causation “is a fact of imputation, not of observation, and so cannot be included in data” (Veblen 1961, 32-55).
In this very regard, Veblen is against marginal utility theory (1909) and mathematical/statistical formulations (1961). More specifically, Veblen was opposed to neoclassical economics of his time owing to its irrelevance to the explanations of the rapid changing everyday life and society (or genuine history). For one reason, in marked contrast to the neoclassical concept of individuals (see chapter 2), Veblen’s conception of active, purposeful, spiritual, and habitual agents and their actions in reference to changing environment (for instance, culture) renders an isolated, universal, and logical (against historical) maximizing decision making mechanism impossible (see Katzner 2001). For another, that reality changes first and then knowledge follows—‘cultural lag’, in Veblen’s terminology, mathematical formulations begin with never changing axioms and assumptions which are obsolete tools for the evolutionary process operating in historical time (Veblen 1961; Tilman 1996, 32).12
Another question arising out of Veblen’s position on formalism is whether the causal explanation or analytical narrative has less explanatory power than mathematical formulations. The answer to this question depends upon reader’s habits of thought acquired by his/her own education. From a Veblenian point of view, the narrative is not necessarily less explanatory in an analytical work as long as we are concerned about the reality and its complexity. It may be possible to show the complex evolutionary process by means of simulation and calibration (see Foster 2005; Foster 2007; Foster and Potts 2007; Radzicki 2003). Such a method, however, is not capable of fully incorporating Veblen’s insights. At best it describes the complex evolutionary path of an event in the conjectural and experimental setting. So, the result is nothing but a manufactured outcome. In a similar vein, evolutionary game models add little insight since the model does not capture how a strategy, a payoff function, and the rule of the game are constructed and changing. There is no reason to assume that the game structure itself is common knowledge or stable over time. In a similar vein, Varoufakis (2008) puts it:
Modeling mutations as random events may be admissible in biological theories of, e.g., the evolution of genes. However, when it comes to human societies, the mechanism generating social and political anti-establishment behavior cannot be treated as statistically independent of the mechanism that alters our character, capacities and social relations...evolutionism [evolutionary game models] cannot furnish a critique of evolved institutions useful either to the historian or the active citizen (87-88, 90, original italics).
The bottom line is that mathematical formulations, no matter how complex they are, close the system that is more complex than we can articulate. Therefore, as Veblen does, it would be better to focus on a particular issue in the real historical, institutional, and cultural context in which a mechanical and linear cause-effect combination is irrelevant. This requires complex analytical narratives that are purposefully designed to illuminate historically contingent deeper causal mechanisms and structures. Quantitative data are serviceable to the only extent that they capture ex post reality or demi-regularity (Lee 2002, 795-796; Downward and Lee 2004).
Consequently, questioning whether Veblen’s economics can be mathematized or not is less important.13 A constructive question would be how to better articulate Veblen without losing real, cultural, comprehensive, and interdisciplinary principles. In this respect mathematical formulations would rather delimit the advancement of Veblen’s causal explanations. Unlike the charge by mathematically-oriented economists, the current unpopular state of Institutional economics is not due to the absence of mathematical articulation in Veblenian Institutionalism, but due largely to the incompatibility of Veblen with the conventional wisdom and the vested interest predominant in economics scholarship. Moving toward strict quantitative Veblenian Institutional economics, thus, is abandoning its emancipatory power.
Veblen’s economics focuses on the evolutionary process in which individual actions, habits of thought, knowledge, institutions, and culture are inextricably entangled. Thus the evolutionary process of human life and society is in its nature complex, cumulative, path-dependent, and open. It is stressed here that the center of Veblen’s synthesis lies in active action rather than in innovative knowledge. Action and knowledge plus instincts and habits are socially defined and generated and thus drive the evolution of the society. Following Veblen’s synthesis, therefore, micro-reductionism is irrelevant and mathematical formulations are critically limited tools for explaining the causal evolutionary process. How to elaborate and develop Veblen’s thought with regard to changing social reality is still open to question.
In sharp contrast to Veblen’s synthesis, the micro-macro dichotomy underlying neoclassical economics has led to micro-reductionism (microfoundation), and formalism. The evolution of neoclassical economics tells us that it is never free from methodological commitments and the existing social order. The conventional wisdom of economics and the vested interests of the ruling elite are interdependent and need each other. Hence, any idea critical of conventional wisdom and the vested interest is dismissed. Without criticism and creativeness, however, existing theory is predestined to demise since the reality never stops evolving.
Under the current rigid environment, Veblen’s Institutional economics is still powerful since it emancipates us from conventional wisdom and vested interests. Ironically, this is the main reason that Veblen is not taught in mainstream schools and Veblenian Institutionalism is marginalized within the economics discipline.
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