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«Making economics more relevant: an interview with Geoffrey Hodgson GEOFFREY M. HODGSON (Watford, England, 1946) is research professor at the ...»

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Erasmus Journal for Philosophy and Economics,

Volume 3, Issue 2,

Autumn 2010, pp. 72-94.

http://ejpe.org/pdf/3-2-int .pdf

Making economics more relevant:

an interview with Geoffrey Hodgson

GEOFFREY M. HODGSON (Watford, England, 1946) is research professor

at the University of Hertfordshire Business School, UK. He is editor-in-

chief of the Journal of Institutional Economics and a member of the

Academy of Social Sciences in the UK. He has published over 120 articles in academic journals and his books include Economics and institutions (1988), Economics and evolution (1993), Economics and utopia (1999), How economics forgot history (2001), The evolution of institutional economics (2004), and (with Thorbjørn Knudsen) Darwin’s conjecture: the search for general principles of social and economic evolution (2010).

Professor Hodgson is widely known for his extensive work on institutional economics, and his numerous contributions to a broad variety of topics in heterodox economics and social theory. His current research focuses on the theoretical and methodological foundations of institutional and evolutionary economics. In particular he is interested in the application of Darwinian principles to socio-economic evolution, the conditions underlying increasing socio-economic complexity, and the impact of increasing complexity in capitalist development.

During a visit to Erasmus University Rotterdam in November 2009 Professor Hodgson granted EJPE the opportunity to discuss many of these issues extensively. The interview ranged widely over such topics as the relationship between institutional and neoclassical economics;

the methodological challenges in institutional economics; the potential role of biological and evolutionary ideas in the social sciences; and the role of economics and economists in the recent economic crisis and how the profession should change.

EJPE’S NOTE: This interview was conducted by Clemens Hirsch, PhD candidate at the Erasmus Institute for Philosophy and Economics (EIPE), Erasmus University Rotterdam, and currently visiting researcher at the Department of Social and Moral Philosophy at the University of Helsinki.

GEOFFREY HODGSON / INTERVIEW

EJPE: Professor Hodgson, you are one of the most well known contributors to contemporary institutional economics. However, your earlier career was quite different. Can you tell us how did you arrive at economics in general and how did you get interested in institutional economics in particular?

GEOFFREY HODGSON: My first degree was in mathematics and philosophy at the University of Manchester. As an undergraduate in the 1960s, I became interested in left-wing ideas—like many others at that time. I got interested in Marxism in general and in Marxist economics in particular. Eventually, I found myself publishing a few articles in that area but they were actually critical of the technical aspects of Marxist economics. That was unusual: I was sympathetic to Marxism, but I was also a critic. My criticisms were based on the then popular framework of Piero Sraffa (1960) and I did some post-graduate work in that area.

A double shift occurred in my thinking in the late 1970s and early 1980s. I became politically disenchanted with Marxism, particularly because of the way that Marxists responded to the free-market arguments of Friedrich Hayek and others. In the Thatcher era their response was very weak, but just as importantly, I thought that the foundational principles of Marxist theory were at fault. I still think there is a lot of validity in Marxism, but I was searching for an alternative perspective. One problem that particularly alerted me was the lack of any developed theory of the human agent in Marxism. Instead, all the explanatory work is done by the social structure: Marxists examine the social structure and then place agents in their positions in that structure. At least in classical versions of Marxism, that is deemed sufficient to explain agent behaviour. I thought that was a major shortfall.

But my dissent was not simply with Marxism. It was also with other versions of heterodox economics at the time. In the 1960s and 1970s at Cambridge, and some other places in the UK and USA, the dominant heterodoxies were either Marxist economics or post-Keynesian economics. Institutionalism was less influential, and was then completely absent in the UK. I turned to the old institutionalism of Veblen in the early 1980s because it had more persuasive psychological underpinnings. I became interested in psychology and critiques of the standard rationality assumptions in economics. I was also influenced by Herbert Simon and by a number of other people, including Hayek and

ERASMUS JOURNAL FOR PHILOSOPHY AND ECONOMICS 73

GEOFFREY HODGSON / INTERVIEW

G. L. S. Shackle. I started a long march that took me away from Marxism and—through Veblen—got me interested in evolutionary theory as well.

For my work on Marxist theory in the 1970s I had a brief international fame. But I walked away from that way of approaching economic analysis. For about ten years I was not invited anywhere.

Things began to change after I published my book Economics and institutions in 1988.

So you were already interested in institutionalist issues before new institutionalism began to emerge in the mid 1970s?





Part of my critique of Marxism was also that it failed to take institutions sufficiently into account. In 1977 I published a book called Socialism and parliamentary democracy, which critiqued Marxism for failing to take the institutional importance of parliamentary democracy into account. Parliamentary democracy is normatively important. But in practical terms it is also an institution with which people have to engage in one way or another. And it is a source of political legitimacy. At the time many Marxists had a crude insurrectionary perspective, where every such institution had to be overturned. I argued against that. So I think there is an institutionalist thread going right back to my Marxist period.

You mentioned that institutions had been ignored—or not properly taken into account—in economics for a long period of time. Why do institutions matter in economics?

Institutions matter because there is no society or economy without institutions. If you define institutions—as many people do—as systems of rules for guiding human conduct, then everything we do is bounded by institutions. We are conversing in a language that has rules. If we do not follow those rules we reduce the probability of being understood.

We have just been for lunch, there we follow rules: about appointments;

about paying; about table manners. Often we do not think about it, we just follow the rules all the time. So, any social activity is permeated with rules and thus rule systems—institutions—are unavoidable.

New institutional economics today is a flourishing but also quite heterogeneous field of research. How would you draw the current boundaries of the field and how would you position your own work within those boundaries?

–  –  –

When the new institutional economics emerged in the current era with the publication of Oliver Williamson’s 1975 book Markets and hierarchies, and several others around that time, it adopted quite a narrow project. This was to take individuals as given and then to try explain how institutions emerge. This struck me immediately as an incomplete story because, again, you have the problem of explaining individual preferences and dispositions. A shortcut is made in the familiar way, as in much of mainstream economics, to simply assume a preference function and not to explain where it comes from. That had already been my concern about other systems of thought, including Marxism. There was no explanation of individual psychology, individual agency, and so on. I reacted against the new institutionalists for that reason, although I was very sympathetic to their concern with real institutions. That was a big change in economics, because previously institutions had often been ignored. The concern with institutions, like the firm and the state, was an extremely important move. I also think that core concepts like transaction costs are important and real, and the logic of transaction cost arguments is powerful. I do not think it is the whole story, but I think it is an important part of the story about why firms exist.

It further became clear, particularly by the 1990s, that there were developments within the new institutionalism that offered a broadening agenda. New institutionalists such as Douglass North (1990; 1994) and Masahito Aoki (1990; 2001) were saying things that were much more consistent with my position. They talked of the need for explanations of institutional evolution and of individual preferences. North developed a theme, which is now very prominent in his work, about ideology and the role of ideas. He writes of the need to learn from cognitive science and psychology. That was exactly my agenda. So I perceived a convergence with North and this wing of the new institutionalism.

Today I would sum up the new institutionalism as very heterogeneous. I find myself comfortable with many aspects of it and I am very critical of other aspects, but I am happy to swim in that pond.

The old institutionalism is also very heterogeneous. A project I started in the 1990s and finished a few years ago was my two-volume history of the old institutionalism: How economics forgot history (2001), and The evolution of institutional economics (2004). My research for these books, which took many years, reinforced my view that the old institutionalism was actually very heterogeneous.

ERASMUS JOURNAL FOR PHILOSOPHY AND ECONOMICS 75

GEOFFREY HODGSON / INTERVIEW

Today I think there is enormous opportunity for the interchange of ideas and conversation between different currents. I describe my own position as an eclectic with a strong Veblenian preference, because I think Veblen had a theoretical system that—although underdeveloped— in many ways remains powerful today.

Do you think there are promising elements in old institutional economics, which have not been taken up by new institutional economics and should be given more attention?

Yes, several things. Psychology is already having an impact in the new institutionalism. But I would like to see that go much further, particularly with respect to theories of the firm and how organizations work more generally. That agenda is an exciting one and if it is pursued, it will give new insights. There is already some movement in that direction.

My research agenda after writing the two books just mentioned was to take up early work on evolution and show how evolutionary principles can and have to be brought in. Perhaps surprisingly for a social scientist, my argument is that the Darwinian core principles—of variation, selection, and retention—offer a general framework that helps us understand all complex evolving systems. This applies to social systems as well. It does not give us all the answers but it is a way of organizing our inquiry in those areas. Old and new institutionalists alike are concerned to explain change, and sometimes radical structural change, in systems. Darwinism offers a framework for further theoretical development in this area.

What about the relationship between new institutional economics and the neoclassical mainstream? It seems that new institutionalists vary in their assessment of the mainstream. Some are very critical about it whereas others essentially side with Oliver Williamson in seeing the new institutionalism as a strand of research compatible with, and largely complementary to, the mainstream. Your own work often is very critical of neoclassical economics. What is your motivation behind this assessment?

I define neoclassical economics in terms of the assumption of rational utility-maximizing agents with relatively well-defined choice sets. A principal aim is to try to explain how particular equilibria are formed through agents making choices and interacting with others in particular VOLUME 3, ISSUE 2, AUTUMN 2010 76

GEOFFREY HODGSON / INTERVIEW

settings. The limitations of neoclassical economics have partly to do with its psychological assumptions and the thinness of the rationality assumption. When expressed in a broad and inclusive manner, the rationality assumption is not so much wrong as rather empty and really not that useful. Gary Becker, for instance, always has to bring in auxiliary assumptions to get anything out of it. Mark Blaug and others have made similar critical points concerning rationality.

One of my criticisms of Williamson is that he does not take context sufficiently into account. When people operate within institutional settings they take into consideration the norms and rules that prevail.

We are social animals. We are strongly attuned to verbal and non-verbal signals, including body language and expressions of sympathy or anger.

Such signals and emotions are all around us in all kinds of institutional and organizational settings. Hence when people go to work in the morning at nine o’clock and go into the firm they become moulded by those institutional and cultural settings. This ‘downward causation’, from institutions to individuals, is lacking in Williamson’s story. He just adopts a comparative statics argument, like Coase did in 1937: Coase considers the relative transaction costs of two governance modes, the market versus the firm. But there is no discussion of how individuals are changed. The same individuals are maximizing the same preference function in both contexts. Williamson also adds an unnecessary but symptomatic twist concerning opportunism. Although some people are opportunistic it is not the main reason for the existence of the firm.

Williamson’s stress on opportunism also goes against the minority of mainstream economists who assume rationality but stress the possibility of altruism.



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