The Institutional Theory of John R. Commons: Foundation for a Heterodox Labor Economics

Abstract

Over the last three decades neoclassical economic theory has become the dominate approach for the study of labor, most clearly in North America but also increasingly in Europe and elsewhere. Rival heterodox approaches, on the other hand, are threatened with marginalization, partly due to the imperializing tendencies of neoclassical economics and partly due to the inability of heterodox economists to articulate an alternative unified theoretical framework. The purpose of this paper is to push forward the heterodox project by outlining a theoretical framework and set of core ideas that may provide the basis for an alterative paradigm. Toward this end, I re-examine the theoretical writings of institutional economist John R. Commons and describe and synthesize his theory of institutional economics. Although his theory is general, I focus on its application to the study of labor. Key concepts are bounded rationality, property rights, working rules, institutions, transactions, and incomplete contracts. I argue that these concepts not only form a coherent body of theory but also give rise to numerous insights and predictions about labor markets and the employment relationship, highlight crucial weaknesses and lacunas in the neoclassical approach, and provide a theoretical framework for an integration of the economic and social dimensions of human behavior.