Economic Ideas of Johan Rogers Commons

The following points highlight the top ten economic ideas of Johan Rogers Commons. The economic ideas are: 1. Economic Institutions 2. Institutional Economics 3. Pragmatic Approach 4. Economic Transactions 5. Theory of Going Concerns 6. Public Utility Theory of Labour 7. Capitalism 8. Explanatory Principles 9. Collective Action 10. Economic Systems.

Economic Idea # 1. Economic Institutions:

In his book “Institutional Economics”, Commons defined institution as a “collective action in control of individual action”. It may be noted that this definition is different from the one given by Veblen. Veblen defined an institution as a widely prevalent habit of thought.

Commons emphasised the mutual dependence of men and the need for co-operation. He emphasised the need for collective action to reconcile the clash of interests which the institution of private property created.

Further Commons believed that all economic institutions were subject to evolution. They evolved gradually. He took the case of capitalism and private property and explained that how these institutions developed gradually.

Economic Idea # 2. Institutional Economics:

This type of economics started with the conflict of interests. To him, institutional economics took its place as the proprietary economics of rights, duties, liberties and gave to collective actions. He strongly criticised the classical and hedonistic theories because the former emphasised the bargaining between two parties and the latter on pain and pleasure as the sole determinants of economic behaviour. In his opinion, both had failed to recognise the importance of collective action.

Economic Idea # 3. Pragmatic Approach:

His work was characterised by two qualities, namely historicity and relativity. He shifted from pure theory to pragmatic theory which stressed the importance of inductive analysis. The pragmatic economists were those who had “an eye on the worthfulness of their reasoning for understanding, experimentation, taking chances, and guiding themselves and others in the future”.

Economic Idea # 4. Economic Transactions:

According to Commons, human behaviour was a social phenomenon as it affected the entire society. Men have to depend on one another and the existence of private property created conflict in them. The dependence of man upon man, and the conflicts between human beings should always be kept in order which was possible only by a study of economic transactions.

He classified these economic transactions into bargaining transactions, managerial transactions and rationing transactions. The main defect of the orthodox economics was that it was concerned only with exchange transactions. Bargaining transactions implied an exchange of goods and services between equals.

In managerial transactions, a legal superior directs an inferior with the help of the state authority. On the other hand in rationing transactions, three parties are involved, namely, a superior authority, an inferior authority, and a court of law for the enforcement of rules. By superior body he means a trade union or a government.

Bargaining transactions lead to the change in the ownership of wealth, managerial transactions create wealth and rationing transactions ration the burden and benefits of the wealth so created. All these transactions are symbolized in a “going concern”.

Economic Idea # 5. Theory of Going Concerns:

Commons defined a going concern as an institution which promised the expectation of beneficial bargaining, managerial and rationing transactions which were bound together by the working rules. It is these going concerns with the working rules that keep them going all the way from the family, the corporation, the state itself.

This theory of going concern was different from the Duty theory and the Liberty theory of the state. Further Commons differentiated between two other terms—going plant and going business. A going plant is the technological organisation, the main aim of which is to attain the highest degree of efficiency and output. On the other hand, a going business is concerned with the production of money values. In Commons’ opinion, the best going business is that in which sales and purchases, technology and business are rightly proportioned.

Economic Idea # 6. Public Utility Theory of Labour:

According to Commons, labour constituted an important part of the national economy, because they created public utilities. He was fully aware of the psychology of labour and the working of corporate managements. So he was instrumental in bringing about improvements in labour legislation, social insurance, public utility regulation, workmen’s compensation etc.

Commons believed that there was a cultural lag between the technological progress and the psychological attitude of employers and workers. He predicted that the future of industry was psychological. So he suggested that the worker should be taught the importance of his job and its significance in the productive process. In short, he was part of the going concern.

Economic Idea # 7. Capitalism:

Capitalism evolved very slowly during the course of centuries. The present form of capitalism is not what it was in the initial stages. It has lost much of its significance and has now become more congenial. Commons divided capitalism into 3 kinds, namely, merchant capitalism or mercantilism, employer capitalism, and banker capitalism.

In employer capitalism, there was factory-method of production and legal control of commodities was separated from its physical control. In banker capitalism, the banker entered into economic activities and the stage of abundance caused by an industrial revolution was merged into an era of stabilisation.

Further, in banker capitalism an economic atmosphere was created in which the corporation played a dominant role. It was a flexible institution. It has influenced legislatures and established strong public relations. Commons believed that a regenerated legislature could enforce effective checks on the operation of this kind of capitalism and the state government by protecting the rights of the individual could save the entire system.

Economic Idea # 8. Explanatory Principles:

Commons introduced 5 explanatory principles namely efficiency, scarcity, working rules, sovereignty and futurity. He discussed the notions of scarcity and efficiency in a detailed manner. Veblen thought that under capitalism a balance could be attained between the two. Whereas the classical economists used scarcity as the basis for value, the Austrian economists adopted hedonistic approach.

Futurity was the most important factor in the collective economics of Commons. Old economists whom Commons called the commodity economists, had ignored the time element. It was the introduction of mathematical statistics which accorded a place to the element of time in economic

Economic Idea # 9. Collective Action:

Commons discussed elaborately the several stages of the development of the economy of collective action. The impetus for the first stage was provided by the development of the market. Technology and credit led to other stages—the retail shop stage to the wholesale stage. Further according to Commons, three major institutions—corporations, unions and political parties played a dominant role in the repetition and changes of human actions and transactions.

Economic Idea # 10. Economic Systems:

Comparing the various economic systems, commons felt that under the existing conditions, it was difficult to decide the best system. Under communism and fascism which had evolved in Russia and Italy, liberty was suppressed.

Commons wanted labour to increase its bargaining power and favoured the organisation of trade unions. He never wanted revolutions and strikes, but “collective bargaining on something like an organised equilibrium of equality……. It seems to be the only way to save us from communism, Fascism or Nazism”.

Critical Estimate of Commons’s Economic Ideas:

In the History of economic thought, Commons was regarded as a great labour economist. He was the father of a labour struggle theory. He always emphasised a compromise between the employers and employees as a solution for conflicting problems.

His treatment was a five dimensional interpretation of modern economy. He tried to avoid the errors committed by the formalistic economics of the classical and neo-classical schools and the descriptive economics of the Historical School. In fact he tried to combine these two analyses in order to avoid the over emphasis of logicality and historicity.

While Karl Marx spoke about a class conflict between labour and capital, Commons saw several group conflicts—between labour and capital, between debtor and creditor, between small business and large business, between conservative and radical labour, between farmers and whole sellers and between buyers and sellers. Further when Marx had set up dualism, Commons developed pluralism and admitted that the class conflict would continue forever.

Though Commons admitted that there were certain shortcomings in capitalism, he was optimistic about the progressive improvement of the workers. At the same time he also noted that capitalism itself had changed considerably since the days of Adam Smith. Today most of his ideas on social reforms are generally accepted. In short Commons made the institutional economics a tool for social reform.

At the same time it must be noted that Commons was not an economic theorist. He simply gave a different point of view to the matters already discussed by his predecessors. He applied the past thinking to the problems of his age, supplemented the work of Veblen and aimed at giving collective action its due place throughout economic theory. His emphasis on legal institutions helped considerably in the development of economic institutions in America.