TIe TIeov oJ InslilulionaI Adjuslnenl

AulIov|s) JoIn Fagg Foslev

Souvce JouvnaI oJ Econonic Issues, VoI. 15, No. 4 |Bec., 1981), pp. 923-928
FuIIisIed I Association for Evolutionary Economics
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J IOURNAL OF ECONOMIC ISSUES
Vol. XV No. 4 December 1981
The Theory of Institutional Adjustment
The dissertation with which Foster gained his doctor's degree from the
Department of Economics, University of Texas, was not the one he wanted
to offer. He originally intended to submit an exposition of the theory of insti-
tutional adjustment, by which he meant the heart of the theory that should
replace orthodox economic theory, and he wrote a draft of that dissertation
during his year at Kenyon. But Ayres convinced Foster that such a disserta-
tion would be unacceptable to his committee, so he did not submit it. The
body of that exposition of the theory of institutional adjustment is lost, but
the present paper appears to be the introduction to it. It was probably written
in 1943.
Even in his early draft, Foster recognized that he could not be as blunt as
he had been in "John Dewey and Economic Value," in which he asserted
that almost all economics before Veblen had been unscientific. Instead of stat-
ing such conclusions, Foster used this introduction to justify his search for
logical unification in the fundamental concepts of economics and to antici-
pate objections to the proposed analysis. First, he explained why a study of
institutional adjustment was necessary. The diversity of opinions upon the
multiple "isms" showed the lack of a unified frame of reference among econo-
mists; each ism was justified in terms of inrternally consistent but mutually
inconsistent analyses. Unification was necessary and could be approached,
Foster maintained, through the theory of institutional adjustment. Such a
theory is a particular application of a unified theory of value, which in turn
is a particular application of the theory of knowledge on which science must
be erected.
Second, Foster anticipated two objections to his thesis. He thought his
committee might be impatient with rehashing the value question and with
criticisms of earlier economists. But he argued that if no unified foundation
for theory exists, it must be developed; impatience with questions neces-
sarily raised in that development means quarreling with the fact of un-
grounded existing theory. He also thought his committee might take up the
argument of some philosophers that the more inductive and singular a fact,
the more probably objective and true it is. By characterizing Foster's disser-
tation as a deductive treatment of plural facts, the committee could impugn
its validity. Foster's wording of this argument seems to be in respon.e to
923
924 J. Fagg Foster
an article by Philip Blair Rice, "Objectivity in Value Judgments," Journal of
Philosophy 40 [1943]: 5-14. Foster was a colleague of Rice at Kenyon Col-
lege during 1942-1943 and had read and criticized this article before its pub-
lication. Apparently, Foster thought his dissertation committee might object
to his analysis in the same ways that Rice objected in his article to the posi-
tion of John Dewey.
Since Foster considers his statement of the theory of institutional adjust-
ment to be his prime contribution to the reconstruction in economics, it is
appropriate here to consider how he used that expression differently from
others. Foster considers a real economic problem to exist whenever there is
disrapport among human activities that are supposed to be correlated in
continuance of the productive process. Resolution of such a problem requires
changing some activities so that the disrapport disappears. This process of
change Foster calls institutional adjustment. Explanation of that process he
calls the theory of institutional adjustment. The theory has the function of
explaining the technological determinants of possible correlated behaviors,
the patterns of recognized interdependence required to correlate those be-
haviors, and the minimal adjustments necessary to restore acceptable insti-
tutional integration.
No one else, to the editor's knowledge, has seen institutional adjustment
as an integral part of the process of solving economic problems. For example,
the eight participants in a symposium sponsored under that rubric in 1965
by the Department of Economics, University of Texas,* apparently consid-
ered institutional adjustment to mean simply changes in behavior. Only three
went beyond mere description of such changes to consider a theory of insti-
tutional adjustment. Kenneth Parsons claimed to identify some principles of
institutional adjustment, but they concern specific historical conjunctures
(singular facts?) rather than the process of solving economic problems. Wen-
dell Gordon made some useful comments on the conditions necessary for in-
stitutional adjustment (as well as examining the Keynesian model, the im-
portance of which Foster discusses in other papers herein), but he arrived
at no general principles. And Clarence Ayres, still seeking to explain the
polarity between institutions and technology, examined humans' emotional
conditioning to supernaturalism and expressed the hope that such condi-
tioning is in process of being shortcircuited. Foster admits that he has been
unable to relate these views of Ayres to his own theory of institutional ad-
justment.
The slightest reflection will bring to mind the great diversity of opinion
about the relationship between government and economic enterprise. In
fact, the multiple "isms" in the current economic and political picture are
nothing less than general opinions on this relationship. In the large, this
*Carey C. Thompson, ed., Institutional Adjustment (Austin: University of Texas
Press, 1967). Reviewed by Robert Lekachman in the Journal of Economic Issues 1
(June 1967): 255-57.
Institutional Adjustment 925
relationship has always been the focus of economic
theory
in that it
in-
volves an effort to make a rational analysis of, and basis
for,
social
policy
in regard to those activities involved in providing the means of life and
experience; and government, in the current state of
affairs,
is one of
the
most important agencies, if not the most important, in
effecting social
policy. Economic theorists sometimes have denied the
social-relationship
aspect of economic theory, but, as we shall see, this does not dissolve the
relationship.
How is it that opinions on the relationship between government and
economic enterprise can be at such great odds with one another? Why
has the problem not been more nearly unified? It cannot be that social
analysts are stupid; the analyses developed by the various schools of
thought are remarkable for their internal consistency and complexity.
And where consistency, in light of the basic concepts involved, is not
maintained, it merely requires to be pointed out to be corrected. Thus,
each school of thought proceeds to refine its analysis toward perfect in-
ternal consistency without bringing its analysis closer to unity with that
of other schools of thought. To find the points of divergence, we are driven
to a reconsideration of those basic concepts. Here, as we shall see, dis-
agreement is so great that the formulations of one school of thought simply
do not make sense in terms of the basic concepts of other schools. It is
here, around these basic concepts, that unification must start. This is
tantamount to saying that the whole procedure of analysis must be re-
ordered. This is a large order, but the actual state of development in
economic analysis permits nothing less. This is not to say that all past
economic analysis is worthless-far from it-but it is clear that without
logical unification of basic concepts no logical resolution of subsequent
problems is possible.
Accordingly, our initial effort is to inquire into the meaning of "value,"
for it is in terms of value, in some connotation or other, that all economic
analysis has meaning. This will require consideration of the notions which
have resulted in the current confusion of value concepts and which throw
light, if only by contrast, on the concept of value, which is the point of
departure for the view presented here. If the meaning of value can be
clearly comprehended, we then shall be in a position to inquire into eco-
nomic problems with mutual assurance. But we shall not thereby have
solved any economic problems. Rather, we shall have attained logical
permission for solving such problems.
If the effort to get at the real meaning of value entails extended criti-
cism of what has paraded as its meaning, such criticism is not to be con-
sidered malicious. It is merely that the theories of value underlying and
926 J. Fagg Foster
permeating even our seemingly most innocent factual studies of economic
data must be kept firmly in mind if logical resolution is to be attained.
But it is in this regard that impatience is most frequently exhibited by
analysts whose formulations are supposed, often by tacit claim, to be
impervious to value-concept foundations. As will be shown, this impa-
tience derives from experience with the sort of argument based upon con-
trary value concepts that are conceived in a manner permitting no com-
parative judgment. Such argumentation cannot possibly lead to agreed
resolution if both parties to the discussion maintain consistency. Experi-
ence with contrary demonstrations of this character thus generates im-
patience and even recalcitrance regarding any considerations of value.
But the problem cannot be avoided; its resolution is necessary before
further inquiry is possible with any assurance of validity. And because
the theory of value basic to the present study is at variance with com-
monly accepted formulations, it is necessary that its demonstration re-
ceive somewhat extended attention.
As will be noted, the theory of value implicated in the present study
is a development which necessarily arises out of the distinction between
the "institutional" and the "technological" aspects of the economy.'
Thorstein Veblen's contribution in this regard gave rise to a school of
thought known as institutionalism. This stems from recognition that the
real burden of economics is the development of the theory of institutional
evolution and the application of the theory to economic problems. Veb-
len's considerations gave great hope of advancing social inquiry in this
regard and consequently aroused much enthusiasm (and alarm). Stu-
dents struck out in all directions to solve economic and social problems
in the light of Veblen's stimulus. Many of them voiced the promise that
the theretofore insuperable difficulties that had obstructed the social sci-
ences were at last overcome, and thenceforth economic problems would
be a matter of applying Veblen's principles. These students failed to
realize that Veblen made hardly more than a beginning in his search for
a theory of institutional evolution, that he developed no principles of in-
stitutional adjustment in any clear-cut and clearly stated fashion. He did
see the overall problem clearly, and he did bring to light much that is use-
ful in formulating the inclusive principles. But the rush toward applica-
tion without clear and explicit comprehension and formulation has spelled
some disappointment and often ridicule. Veblen indicated the direction,
as it were, and many students started out posthaste only to find them-
selves guided by old sign posts at each turn in the road. They thus fre-
quently found themselves, after great journeying, to be about where they
were when they started.
Institutional Adjustment 927
Here, the major burden of the present study is brought to point. The
principles or inclusive, continuing facts in the evolution of institutions
are brought into as sharp focus as possible. The present writer prefers to
speak of institutional evolution as institutional adjustment. The reasons
for this selection of terminology will become apparent as the study pro-
ceeds. As we shall see, valid answers to economic problems are, and must
be, of the character of institutional adjustments. We shall see that if the
items in a given institutional situation or pattern be considered the basic
data and therefore not subject to modification, then no resolution of a
problematic situation involving such items is possible. It will become clear
that to seek an answer in other terms involves arguing with the facts. And
the world is too patient already with an economics that argues with the
facts.
The principles established in the present study are an effort to extend,
in a unified manner, the theory of value into the theory of institutional
adjustment. In a very real sense, the principles of institutional adjust-
ment are encompassed within the theory of value, being merely the more
particular application of the general theory of value, which in turn is the
more particular application of the theory of knowledge itself. This, of
course, is precisely what has happened in every field of inquiry that has
attained the stage of development called "scientific." Occasion will arise
to observe more closely this essential identity between the various fields
of inquiry. Indeed, the present study is a plea for, and an effort toward,
scientific analysis of economic phenomena.
It cannot be objected in this regard that such inquiry is "deductive,"
that it involves "plural" as distinct from "singular" facts as its basic data.
No question of "plurality" or "singularity" of facts can enter the case. Any
fact is as "singular" as any other fact in that it is an existential reality;
and any fact is as "plural" as any other fact in that it is capable of more
minute and detailed description and more extended explanation without
invalidating the more inclusive fact of which it is a part. The truth is that
in every field of inquiry the procedure has been from the more obvious to
the more obscure without regard to "singularity" or "plurality." Physics
has proceeded, as it were, from a falling apple to stellar systems, on the
one hand, and to atomic theory, on the other. And the solar system is as
singular a fact as is an atom. No idea can be open to proof or disproof on
the basis of its inclusiveness; its one claim to validity is in its correspon-
dence with the facts, and facts may be of any degree of inclusiveness.2
After setting forth the theory of institutional adjustment in terms of its
inclusive principles, an effort is made to apply the theory to the problem
of the relationship between government and economic enterprise. This
928 J. Fagg Foster
problem is chosen because it offers more obvious application of the theory
and because the importance of the problem in the current circumstances
cannot be exaggerated. Also, the problem offers less temptation to im-
merse the analysis in minute data, which, although they offer necessary
content to many problems, often screen other problems from constant
and clear view. In addition, the necessary facts are to be observed readily,
and consequently they have been well established. Furthermore, the prob-
lem of the relationship between government and business is in constant
and historic focus in economic analysis, as, indeed, it is in the popular
apprehension.
In arriving at the point of this study, no particular claim to discovery
is made. Each of the three principles of institutional adjustment is vari-
ously appreciated throughout economic literature, and each of the prin-
ciples has received more or less clear treatment, in isolation. But nowhere
is there an effort to indicate their interrelationship. In fact, the inclusive
principles have not heretofore been given names.
Notes
1. This distinction was brought to focus by Thorstein Veblen but is still be-
ing clarified and extended by students in every field of social thought.
2. To mention this sort of criticism would appear superfluous except that
repeated experience has indicated that the matter should be settled at the
outset.