Institutional economics and psychoanalysis: how can they collaborate for a better understanding of individual-society dynamics? Arturo hermann* may 2005


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Other important contributions to the understanding of the dynamics of individual and collective action are provided by Commons. As with Veblen, we will organize our discussion around a number of his key concepts.
Collective Action and Transactions
One of Commons’s most important insights (in particular, 1924 and 1934) is that collective action is a necessary element for an adequate performance of individual action. In this sense, collective action is considered the correct subject for the study of society; the dialectic and dynamic relation existing between individual and collective action is effectively expressed in this passage:
“Thus, the ultimate unity of activity, which correlates law, economics and ethics, must contain in itself the three principles of conflict, dependence, and order. This unit is a Transaction. A transaction, with its participants, is the smallest unit of institutional economics.”, (Commons, 1934: 58).
Transactions are classified into three categories — Bargaining, Managerial and Rationing — according to the relationship established between the parties involved.

The first concerns the relation between individuals with equal rights — which does not necessarily correspond to equal economic power — for instance, between buyer and seller; the second regards the relations between people organized within an institution, for instance between a manager and his or her collaborators; and the third refers to the relations between the person and a kind of collective action where there is no direct involvement, as happens, in particular, in the policy action of Government.

These transactions are quite diverse according to the degree of direct intervention of collective action but, at the same time, are extremely intertwined. In their various combinations, they make up the tangled weft of collective action. Such links appear clearly in the following passage,
“These three types of transactions are brought together in a larger unit of economic investigation, which, in British and American practice, is named a Going Concern. It is these going concerns, with the working rules that keep them agoing, all the way from the family, the corporation, the trade union, the trade association, up to the state itself, that we name institutions....If we endeavor to find a universal principle, common to all behavior known as institutional, we may define an institution as Collective Action in Control of Individual Action.”, (Commons, 1934: 69).
It is interesting to observe the complex, conflicting and evolutionary role that institutions assume in Commons's analysis, as expressed in the following passage,

“....Since liberation and expansion for some persons consist in restraint, for their benefit, of other persons, and while the short definition of an institutions is collective action in control of individual action, the derived definition is: collective action in restraint, liberation, and expansion of individual action....Thus conflict, dependence, and order become the field of institutional economics, builded upon the principles of scarcity, efficiency, futurity, working rules, and strategic factors; but correlated under the modern notions of collective action controlling, liberating, and expanding individual action.”, (Commons, 1934: 73, 92).

The importance of this concept of institution lies in the fact that it does not consider individual and collective action as opposite entities, but on the contrary, as different but complementary aspects of the "human-will-in- action". As Commons explains,
“The most important of all investigations in the economic affairs of life, and the most difficult, as we shall find, is the investigation of strategic and contributory factors. It is none other than a universal principle of human will in action—a principle that could not emerge with John Locke’s concept of a passive mind analogous to physics, and emerges full-fledged only when economics becomes a science of human will in all its activities.”, (Commons, 1934: 90).
The importance attributed by Commons to the human will does not mean, however, the adoption of a mere "contractual" view of institutions that overlooks the role of coercion and unexpected consequences of human action. As a matter of fact, Commons takes these aspects explicitly into account, but, instead of treating them as exogenously determined by some dusky and impersonal "structural factor" or "natural law", considers them as the outcome, more or less direct, of the joint action of all the "human will-in-action" in any given context.

In this sense, collective action is something more than the mere sum of individual actions. In fact, in many ways collective action has a bearing on individual behaviour and, furthermore, can generate effects which do not lie in the intentions of the individuals promoting it.

However, if collective action and its related institutional structure arise out of conflicts — which are also related, as Commons stresses in many occasions, to ignorance, passion and stupidity — it could hardly be the case that collective action is not influenced by the characteristics of individual action. But, and this constitutes one of Commons's most significant insights, such an individual action tends increasingly to take place within institutions — e.g., within a framework of collective action — rather than be the expression of a series of self-contained acts.

Negotiational Psychology, Will-in-Action and the Process of Choice
In his analysis of institutions Commons underlines the importance of negotiational psychology for a better understanding of the role of collective action in individual behaviour and, relatedly, the role of individual behaviour in collective action.

Indeed, negotiational psychology involves the idea of conflict between different feelings and values, which find their manifold expression in the dynamics of individual and collective action. Within this process, the importance attributed to social psychology appears in the following passages,

“ ....If it be considered that, after all, it is the individual who is important, then the individual with whom we are dealing is the Institutionalized Mind. Individuals begin as babies. They learn the custom of language, of coöperation with other individuals, of working towards common ends, of negotiations to eliminate conflicts of interest, of subordination to the working rules of the many concerns of which they are members. They meet each other, not as physiological bodies moved by glands, nor as "globules of desire" moved by pain and pleasure, similar to the forces of biological and animal nature, but as prepared more or less by habit, induced by the pressure of custom, to engage in those highly artificial transactions created by the collective human will....Every choice, on analysis, turns out to be a three-dimensional act, which — as may be observed in the issues brought out in disputes — is at one and the same time, a performance, an avoidance, and a forbearance....The psychology of transactions is the social psychology of negotiations and the transfers of ownership. Each participant in the transaction is endeavoring to influence the other towards performance, forbearance, or avoidance. Each modifies the behavior of the other in greater or less degree. Thus each endeavors to change the dimensions of the economic values to be transferred. This is the psychology of business, of custom, of legislatures, of courts, of trade associations, of trade unions....This negotiational psychology takes three forms according to the three kinds of transactions: the psychology of persuasion, coercion, or duress in bargaining transactions; the psychology of command and obedience in managerial transactions; and the psychology of pleading and argument in rationing transactions.

The fact that this is a behavioristic social psychology requires distinction to be made from the individualistic behavior psychology of those who reject ideas altogether as merely subjective and unmeasurable, basing their psychology on the glands, muscles, nerves, and blood currents, etc. Negotiational psychology is strictly a psychology of ideas, meanings, and customary units of measurement.

Negotiational psychology approaches more closely to the "Gestalt" psychology, which, however, is distinctly an individualistic psychology, concerned with the mental growth of the individual from infancy. The resemblance consists in the fact that the Gestalt psychology is a part-whole psychology, wherein each particular act is connected with the whole configuration of all acts of the individual.", (Commons, 1934: 73-74, 88, 91, 106).
One consequence of this view, relevant also for our subsequent discussion, is that in Commons's view the difference between individual and social psychology tends to be blurred, in the sense that the one is considered the complement — a kind of alterego — of the other.

With regard to psychoanalysis, Commons agrees with its methodology although he considers it, along with all other psychological fields, a kind of individual psychology, as appears in the following passage,

"....Yet opinion and action cannot be separated in scientific investigation, for action is opinion-in-action and science measures the action while inferring the opinion. Habitual and customary assumptions are read into habitual and customary acts. Here the process of investigation is similar to psychoanalysis, but, instead of an individualistic science which investigates nerves or dreams as an explanation of individual behavior, social science investigates habitual and customary assumptions as an explanation of transactions.", (Commons, 1934: 698).

Now we can observe, anticipating a bit of our subsequent discussion, that psychoanalysis, especially in its recent developments, draws attention to the biological component of human psychology not as a way of disregarding the emotional, intellectual, and collective dimensions of the personal life but, on the contrary, in order to analyse all the complex interactions between the mental and biological components of personality.

Furthermore, it is important to observe that Freud has always considered the collective dimension of life central for the study of individual psychology and has provided many contributions to these issues; he went so far on these grounds as to regard, in his Massenpsychologie undIich-Analyse (1921), collective psychology as the unit of analysis from which to understand individual psychology.
Social Value and Policy Action
An important aspect of Commons's analysis is that his definition of transaction considers, in their interaction, all kinds of social and economic relations—from the more individualistic to the more collective; a crucial element in these dynamics concerns the role played by all these transactions in making up policy action.

In fact, in Commons's analysis policy action takes place not only within the sphere of rationing transactions, but also within the scope of the other two types of transactions (bargaining and managerial) which seem to regard more individualistic spheres of action; even in these cases individuals seek to attain their objectives through the aid of collective action, and then their actions tend in one way or another to influence policy domain.

Even when the action seems utterly individualistic — for instance in the case of a single transaction where the buyer and the seller seem to act exclusively out of their personal interests — there is the presence, often implicitly, of a significant collective element. Indeed, even that transaction is created and regulated by a set of norms and institutions that are the expression of a number of collective interests—for instance, in the sphere of consumption, expressed by Antitrust Bodies, by Justice and Arbitration Courts, by Consumers and Environmental Associations, and, of course, by all the related institutions, legislation and regulations.
This view of a dialectic and dynamic interaction between individual and collective action brings to the fore the complexity of factors underlying economic structures and the paramount role played by past and future. In this sense, Commons's analysis takes into account the evolutionary character of economic systems, which he regards not as deterministic in nature but, as stressed before, as complex systems in which many forces are at play and where uncertainty is the rule.

These aspects show the importance of the process of social value in the dynamics of collective action; within this context, the concept of reasonable value is employed by Commons to draw attention to the conflicting, imperfect and evolutionary nature of the process of social value; these concepts are effectively expressed in the following passages,

“Each economic transaction is a process of joint valuation by participants, wherein each is moved by diversity of interests, by dependence upon the others, and by the working rules which, for the time being, require conformity of transactions to collective action. Hence, reasonable values are reasonable transactions, reasonable practices, and social utility, equivalent to public purpose....Reasonable Value is the evolutionary collective determination of what is reasonable in view of all changing political, moral, and economic circumstances and the personalities that arise therefrom to the Supreme bench.”, Commons (1934: 681, 683-684).
Reasonable value is by definition an imperfect entity whose characteristics may be interpreted as the synthesis of the conflicting and evolutionary components of collective action. In these situations it is important that every component of society find adequate expression through the forms of collective action. As we will see later on, the imperfection of social valuing is also caused by its partly unconscious and conflicting character, often embodied in habits of thoughts and life.

Veblen’s and Commons’s analyses highlight the function that institutions, values, norms and habits have in the dynamics of society and the role played by technological, economic and psychological aspects in shaping such evolution.

Within this ambit, many of Veblen's and Commons's concepts could be — without overlooking the differences existing between their theories and their overall vision of the world — jointly used in the study of society: for instance, Commons's concepts of institution, transaction, collective action, working rules, going concerns, reasonable value and negotiational psychology could highlight the interrelated and conflicting aspects of collective action, in particular in the sphere of the complex propensities and motivations of the person; relatedly, Veblen's concepts of habits, instincts, evolution and technology could help bring into better focus the inner motivations and conflicts underlying human action within its ISEF, with particular attention to the role of workmanship and parental bent propensions and the role played by habits as the carriers of any given historical heritage.

Building on these concepts, subsequent contributions have developed the key concepts of institutional economics in many directions.

In this regard, an issue which receives growing attention is the process of formulation of economic and social policies in their relations with institutional dynamics. The relationship between institutions and policies was first pointed out by Commons and then developed by later institutionalists, for instance, in the following passage,

“Policy is a primary concern of institutionalism for two basic reasons. First, it is not possible to understand the economy outside a policy context, and second, the instrumental philosophy to which institutionalism adheres is concerned with finding solutions to problems. The economy is the result of the working of social processes, and modern societies structure a good deal of their institutional processes through policy.”, (Hayden, in Hodgson, Samuels and Tool, 1994: 392).
In this analysis a central role is played by the process of social valuing, which constitutes — more or less explicitly — the very core of policy making. The following passages effectively express this concept,

“To conceive of a problem requires the perception of a difference between ‘what is going on’ and ‘what ought to go on’. Social value theory is logically and inescapably required to distinguish what ought to be from what is....In the real world, the provisioning process in all societies is organized through prescriptive and proscriptive institutional arrangements that correlate behaviour in the many facets and dimensions of the economic process. Fashioning, choosing among and assessing such institutional structure is the 'stuff and substance' of continuing discussions in deliberative bodies and in the community generally. The role of social value theory is to provide analyses of criteria in terms of which such choices are made.", (M.Tool, in Hodgson, Samuels e Tool, 1994: 406-407).

In this way, it is possible to identify the multifarious levels of collective action, and in particular: i) the complexity of individual motivations and systems of value, where the relational or social dimension plays a paramount role; ii) the complexity of policy action, which involves not only governmental institutions but also every other level of collective action; iii) consequently, the fact that dynamics of institutions and dynamics of policies represent complementary aspects of collective action, where, in the first (the institutions) the stress is on structure, decision-making process and cultural evolution, while in the second (the policies) the focus is on action and results.

By thus furthering the process of social valuing, it would become possible to cast more light on the complex interplay between institutional framework and policies at the various level of collective action; this process, in turn, would help reduce the typical problems11 of policy action, which refer, as is well known, to the following interrelated factors:

  • Complexity and uncertainty of policy action, due also to the interrelations between policies and the consequent involvement of many institutions;

  • different opinions and goals of the actors involved in policy-making;

  • difficulty — due also to path-dependency and lock-in phenomena — of prompting the economic and institutional changes which may be necessary for the effectiveness of policies.

In the analysis of these problems, by clarifying the effects, the links and the conflicts existing between policies, institutional theory would help formulate policies more based on the motivations and experiences of people involved in collective action. This implies that a process of policy action of this kind, by involving a process of understanding the characteristics of any given ISEF, can provide better answers to questions which are central for institutional economics, such as:

a) Why do individual habits of thoughts depend heavily on the characteristics of the ISEF and tend to change very slowly?
b) Why don't institutions, in some cases, attain their established goals?
c) What is the role of economic, social and cultural conflicts in shaping the individual’s habits and behaviour?
In this regard, the point we wish to stress is that Veblen's and Commons's theories — and, in the same vein, subsequent institutionalists' contributions — are constructed in an interdisciplinary spirit, where psychology plays an important role. This is a direct consequence of the methodological approach adopted by these authors, an approach which, having strong roots in the Pragmatist approach to philosophy and psychology, is based on a systematic analysis of the facts and experiences of reality.

However, given the complexity of the issues at hand, it seems useful also to address other psychological theories in order to cast more light on a number of interesting questions. Before analyzing how the interaction between institutional economics and psychoanalysis can be realized, in the next chapter we will outline the main aspects of the psychoanalytic approach.

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