Common ground for institutional economics and system dynamics modeling

Institutional economics traces its roots to the works, beginning in the late nineteenth century, of Thorstein Veblen, John R. Commons and Wesley C. Mitchell. They believed that orthodox economic theory, based on deduction from axioms, was not a proper foundation to study the economy. They attempted to establish relations between economic actors as defined by important economic institutions. Classical theory, on the other hand, is based on natural law rather than human organization. Natural law provided a fixed structure, and this reduced uncertainty in economic theory. Change was within the structure but the structure was always stable. Institutional economists examine institutions that provide economic order, and they study the endogenous forces that cause these institutions to evolve. The author suggests that these are some of the same elements that describe system dynamics. Copyright © 2004 John Wiley & Sons, Ltd. Syst. Dyn. Rev. 20, 275–286, (2004) In 1898 Thorstein Veblen asked, “Why is Economics not an Evolutionary Science?” (Veblen 1898). Veblen sketched out the changes in habits of thought from primitive animistic views of hunting and gathering and small agrarian societies to the prevailing view of his time of a natural order inspired by the work of Isaac Newton. His argument was that most sciences were moving beyond the view of a Newtonian natural order and adopting the more recent evolutionary view of inspired by the findings of Darwin. In his opinion economists needed to adopt the latter view if they were to be considered a modern approach to scholarly inquiry. In this article, I will outline the major differences between these two views of economic society and suggest what the implications are for modeling economic behavior. My purpose in this article is to suggest that practitioners of system dynamics and institutional economists share some common ground regarding the structure of the economy and the processes of change emanating from that structural order. I believe that both groups endorse the Darwinian view of cumulative change over the Newtonian view, though their methods of inquiry are substantially different. We should not let our methods separate us, but instead we should learn from each other. Michael Radzicki has appealed to institutional economists to consider the potential of system dynamics modeling to give more discipline and credibility to their participant–observer case studies (Radzicki 1988, 1990, 2003). In the same spirit, my intention in this article is to encourage system modelers to become more aware of the scope and method of institutional Glen Atkinson