— Ch. 1 · Origins And Founders —
Institutional economics.
~7 min read · Ch. 1 of 7
The name institutional economics first appeared in print during the winter of 1919. Walton H. Hamilton published an article titled The Institutional Approach to Economic Theory within the pages of the American Economic Review. This publication marked a turning point for scholars who had long felt that standard economic models ignored the messy reality of human society. Before this moment, economists focused on abstract exchanges between individuals or broad income flows. They treated markets as self-correcting mechanisms driven by rational actors seeking maximum gain. Hamilton and his contemporaries argued that these assumptions failed to explain why people actually behaved the way they did. They looked instead at organizations composed of real people living within specific social structures. Thorstein Veblen, Wesley Mitchell, and John R. Commons became the central figures of this emerging tradition. These thinkers rejected the idea that preferences were stable or that humans acted purely out of self-interest. Instead, they believed that habits, culture, and legal frameworks shaped every economic decision. Their work laid the groundwork for what would become a leading heterodox approach to economics today.
Veblens Evolutionary Critique
Thorstein Veblen wrote his most famous book while he was still a professor at the University of Chicago. The Theory of the Leisure Class arrived in 1899 and immediately challenged the prevailing view of consumer behavior. Veblen observed that wealthy individuals often purchased goods not for their utility but to display status. He called this phenomenon conspicuous consumption. People bought expensive items to prove their success to others rather than to satisfy any practical need. This critique extended beyond shopping habits to the very structure of industrial production. In his 1904 book The Theory of Business Enterprise, Veblen distinguished between two distinct motivations. One group sought to use technology to improve life through productive innovation. Another group used business mechanisms to extract profit from those same technologies. Veblen argued that the pursuit of profit often hindered technological progress. Businesses created monopolies and restricted output to maintain high prices. They employed excessive credit and manipulated political power to protect existing capital investments. These actions led to depressions and increased military spending during times of peace. Veblen warned that these tendencies would eventually cause financial instability. His predictions seemed to ring true after the Wall Street Crash of 1929.