John R. Commons
Social Reformer and Institutional Economist
Lafayette G. Harter Jr.
[Reprinted from the American Journal of Economics
and Sociology, January, 1965]
IN VIEW OF THE ATTENTION given economic development recently, it is
appropriate to re-examine the works of an early pioneer in the field,
John R. Commons. As an economist of the Institutionalist School, he
insisted that cultural forces, legal institutions, religious
influences, social customs, and many other ever-changing factors now
considered by modern developmental economists be included in the field
of economics. He would have found himself in sympathy with Benjamin
Higgins who said, ". . . the Western economist, who finds himself
assisting the government of an undeveloped country with its
developmental planning, finds little in his specialized training to
help him; hence he is apt to flounder. The market provides little or
no guidance." Commons would have gone further to say that the
economic theories of his contemporaries were not adequate for the
study of America's developing economy.
In Commons' day most American economists lacked interest in
developmental problems. Instead they focused their attention on the
mechanism of the perfectly competitive market model. Using mostly
deductive reasoning from a limited number of axiomatic propositions,
they attempted to apply their model without adequately considering
changes over time. Important as this model was for the development of
economic analysis, it failed to satisfy a vocal minority of American
economists, the Institutionalists.
COMMONS SHARED THIS DISSATISFACTION. Born in 1862, he reached
graduate school at the Johns Hopkins University in 1888 while Richard
T. Ely was attacking static, deductive economic thought. Ely gave
his students some of the point of view he had gained from his training
in Germany. In this atmosphere Commons began his lifelong dissent
against the main stream of economic thought.
Although he neglected to finish a Ph.D., he entered a life of
academic teaching. After teaching at Wesleyan University, Oberlin
College, University of Indiana, and Syracuse University, in 1904 he
joined the faculty of the University of Wisconsin. There he remained
until he retired in 1932. Few teachers have ever had as great an
impact upon their students as did Commons. He trained a host of
prominent students, most of whom considered themselves as
Commons did not leave his economic protestantism to his classrooms.
In Wisconsin, Progressives such as the LaFollettes engaged him to
formulate ideas for legislation on work safety, workmen's
compensation, unemployment compensation, minimum wages, civil service,
and public utility regulation. He served on commissions for both the
state and federal governments.
But Commons was more than a reformer; he was a major leader in a
particularly American school of thought. In addition to influencing
his students directly, he wrote prolifically. Much of what he wrote
was oil specific economic problems, but his major contributions were
to institutional economics.
The Institutionalists were rebelling against what they considered was
the excessively static nature of economic reasoning of their day. The
revolt had already begun by German-trained American economists such as
Ely in the nineteenth century. In fact, the American Economic
Association was formed by this earlier group, but it soon slipped into
more orthodox hands. However, many Institutionalists have been
officers of the association.
Shortly after the turn of the century the Institutionalists emerged
as an identifiable protest movement. The terra "Institutional"
gained currency shortly after Walton H. Hamilton introduced it at the
1918 meeting of the American Economic Association. He explained
that such Americans as Henry Carter Adams, Charles Horton Cooley,
Thorstein Veblen, and Wesley Mitchell had already made significant
contributions to this brand of economics. He might have mentioned
others including John R. Commons, then the president of the American
There are three branches to Institutionalism corresponding to the
influences of Mitchell, Commons, and Veblen. Emphasis on empirical
studies, statistics, and economic fluctuations stem from Mitchell who
left the National Bureau of Economic Research as a monument to his
kind of economics. Commons joined him in the formation of the bureau
and served with him as a director of it for many years. Close as
Mitchell was to Commons, Mitchell was even closer to Veblen who had
been his teacher. Yet Mitchell remained aloof from the cleavage
between Commons and Veblen. Although sympathetic with both, he
preferred limiting his studies to what he could measure. Consequently
any division between Institutionalists has tended to be between the
followers of Veblen and Commons.
There is much in common between the two economists even though their
goals are different. They were both impressed with the rapid
economic changes which they and their generation witnessed. Both be
lieved that the task of economists includes explaining economic
develop ment. They watched the biological sciences accept the
Darwinian explanation of evolution and, in doing so, found what they
thought was a fruitful methodology for economics.
Both Commons and Veblen believed that men live by habits and customs.
Men even allocate their resources by habit and custom rather than on a
rational basis. Not caring to think except under necessity, men prefer
the security of established routines which develop into institutions.
These institutions change, but only when subjected to the influences
of strong forces.
The two men differed in their explanations of the cause and nature of
change. While Commons stressed institutional adaptation to changing
conditions, Veblen emphasized the reverse. He demonstrated how old
habits and institutions inhibit adaptation to changes induced by
technical innovations. Old instincts, remnants from the days of
savagery or barbarism, cause men to cling to practices and thoughts
which would be ridiculous, if objectively viewed. But man is not
rational: he is a creature of superstitious and anthropomorphic
Yet some men do think more rationally than others, because their jobs
condition their minds. These are the industrial workers and
technicians who work with machines. By watching cause-and-effect
sequences they begin to shed notions which ascribe Divine
intervention, luck, magic, or other supernatural explanations as
causes. They are practical men who take pride in good and productive
Unfortunately, the more rational industrial workers (or engineers)
are not in control of economic institutions. Instead, a leisure class
controls both government and industry. This class, whose members avoid
productive labor as being beneath them, has been shielded from the
processes which produce rationality. Hence, they tend to be
conservative (except in consumption) and attempt to inhibit any
changes in the status quo.
Being throwbacks to the predatory class which dominated barbarian
cultures, the members of the leisure class are more interested in
their own pecuniary gain than in production. They engage in fraud,
chicanery, and other predatory practices which undermine the stability
of the economy. During boom times their fierce competition, their
speculations, and their credit manipulations cause them to overtax the
economy. Inevitably the credit structure collapses under their
excesses. Exogenous forces may restore prosperity temporarily, but
recovery cannot be permanent.
The pecuniary interests seek relief by combining into huge monopolies
for die purpose of limiting production. This measure of stabilization
is helpful in maintaining profits only temporarily. Finally it leads
to a stalemate of declining production and employment. Veblen was not
sure of the outcome. He thought the government might purchase enough
armaments and other goods which might be produced with the excess
capacity. By reverting to a warlike imperialism, a nation might find
relief from chronic economic stagnation.
The sensible alternative, he thought, was unlikely to happen in the
calculable future. If the technicians and engineers, who actually run
the industrial enterprise, would revolt from their financial masters,
the businessmen, they would free the economy of the fetters which
limit production. By cutting out waste, eliminating selling costs, by
canceling financial claims of the vested interests, and by putting the
idle to work, the engineers could increase production many times.
Unfortunately, they "are a harmless and docile sort, well fed on
the whole, and somewhat placidly content" with their lot.
Like most of the population, they are caught in a web of institutions
which inhibit them from making drastic changes.
While Veblen stressed why men are tardy and incomplete in adapting
their institutions to changing conditions, Commons explained how they
do adapt. Furthermore, he said men have the power to take the
initiative in reforming their institutions. His own carter not only
demonstrated this possibility but also displayed a practical strategy
Commons based his analysis of institutions on C. S. Peirce's
pragmatic psychology as applied to individuals and groups. His
version of this psychology included a concept of thought
processes. Men experience repeated sensations and remember them.
They begin to anticipate the end of a sequence of sensations by
noticing the similarities in the beginning. When their expectations
turn out to be wrong, they become aware of differences. Consequently
the mind can organize its impressions by verifying the expectations.
By reacting to stimuli in the manner in which they have had previous
successes, men form habits. Such habits substitute order for random
activity in men's behavior.
Just as individuals follow habits, groups follow customs. To do so
provides security of expectations. Yet because groups and their
members have wide ranges of differences, habits and customs come into
conflict with one another. Conflicts also originate because there is a
scarcity of goods in the world. Yet these conflicts must be
resolved for men to organize production efficiently. Working together,
men both increase the goods available and create an interdependence
upon one another.
When men combine into going concerns, they create mechanisms by which
their conflicts can be resolved either by the group or by its leader.
Case by case, the conflicts are solved in such a way that patterns are
set up for the future.
THE TRANSACTION is the dynamic element in the functioning of our
economy." It is the means by which people, individually and
collectively, determine the proportioning of resources, the extent of
output, and the distribution of rights, duties, and benefits. Some
transactions are strategic in that they become the basis for
establishing customs, resolving conflicts of interests, and
establishing working rules. Others are merely routine, following
the guidelines set down by the strategic transactions.
There are three ways a transaction can take place. One method is
by the bargaining between the parties interested in the transaction.
Such bargaining may determine prices, wages, and other considerations
in a contract. In situations where a legal superior determines
conditions for a legal inferior, Commons called them managerial
transactions. The employer may issue an order which the employee is
obliged to execute. Any transaction taking place within a firm, or
between branches of a firm, would come under this category. The third
type Commons used was what he called rationing transactions. This type
is between a collective superior and individuals who are inferiors. He
gave as illustrations logrolling activities, taxation, and tariffs in
Congress and the legislatures; the decisions of an arbitrator; and the
decrees of a dictator. Such transactions involve the rationing of
wealth or purchasing power to subordinates without their participating
in bargaining. In the process of arriving at a decision, the superior
may be subjected to pressures of the inferiors in arguments and
pleadings. Yet the ultimate decision remains in his hands. This
particular type of transaction may include the laying down of "working
rules" by the superior.
In Commons' analysis, the bargaining transactions play the greatest
role. He focused his attention on the buyer and seller whose bids and
offers are the closest as negotiations begin. Each is assumed to
have a next best opportunity which would set limits beyond which the
final price could not go either above or below. In perfect competition
these upper and lower bargaining limits would coincide with the market
price so that bargaining would be unnecessary. To Commons, who was a
labor economist, bilateral monopoly was the more general case.
Where, between the limits of bargaining, negotiations will finally
fix the price depends upon the bargaining power of the negotiators.
The ability of the bargainers to use duress, economic coercion, or
persuasion will determine the relative bargaining power.
In the background of every transaction stands the sovereign power of
the State as exercised through the judicial system. If physical
coercion or duress were not suppressed by the State, transactions
would be little more than robbery. Private property could not
exist if the State did not create the rights and duties connected with
this institution and then guarantee them with the use of physical
force, if necessary. Ownership of property is the possession of
certain rights connected with property. Corresponding to these rights
are the duties of other individuals to respect those rights.11 For
example, the right to exclusive use of the crops of some land must be
backed by the existence of the duty of others to refrain from
appropriating those crops.
Although the State does not prevent all economic coercion, it does
set upper and lower limits. For example, where an individual or
organization has a monopoly of a commodity necessary to society, the
State sets an upper limit on the price which may be charged.
Public utility companies must gain permission from the State before
raising their rates. At the same time, courts prevent the state
governments from reducing rates of the public utility companies to the
point where the result would constitute confiscation of property. In
between these points, rates or prices would be considered by the
courts as "reasonable."
The State limits its interference with the exercise of persuasion to
the prevention of fraud, misrepresentation, or unfair use of
pressure. A minor, or someone not mentally competent, is protected
from someone else who would take advantage of his weakness.
Furthermore, the State suppresses fraudulent advertising and requires
sellers to list ingredients in the products which they sell.
Where the State does not limit powers of persuasion and economic
coercion, private associations are in many cases organized to equalize
the power of the bargainers. Professional organizations develop sets
of "Professional Ethics" which, to a considerable extent,
are attempts to prevent unfair methods of persuasion by advertising or
unfair pressure on the client.1* Businessmen have their business
ethics, while trade-union men have their union ethics.
To equalize bargaining power and control competition, workers form
unions while businessmen form employers' associations and other
organizations both formal and informal. According to Commons, control
of competition has two directions. One is to equalize the bargaining
power between the buyer and seller. The other is to equalize the power
of the competitors on one or sometimes both sides of the transaction.
Trade unions, for example, owe their existence to the desire to
control competition among workers as much as they do to equalize the
bargaining power with that of the employers. Unions attempt to control
workers so that employers may not take advantage of the differences
between workers. In this attempt the unions do not allow the workers
to make special arrangements with the employers, because if they did,
collective bargaining would be more difficult. Businessmen also will
attempt to control competition among themselves unless restrained by
In many cases the State has encouraged organizations whose purposes
are to increase the bargaining power of groups which would otherwise
be inferior. Unions among workingmen, co-operative marketing
organizations among farmers, and co-operatives among consumers have
been encouraged. Yet the State has suppressed organizations whose
primary purpose is to control competition. The antitrust laws aim at
preventing combinations which would be in unreasonable restraint of
trade. The law even interferes with vigorous competition which might
lead eventually to greater inequality of bargaining power. Commons'
ideal of promoting greater equality of bargaining power can be applied
with greater consistency than the ideal of perfect competition held by
other economists of his day.
Commons did not believe in controlling the economy, not even to the
extent a number of other Institutionalists would. He would merely set
reasonable limits within which individuals would be free to
bargain. Exactly what those limits would be is not something an
economist can determine precisely. But when the injustices of the
status quo are aired, the rights of vested interests duly considered
and provided for, and all other pertinent facts are explored,
compromises are possible. Precedent establishing strategic
transactions can provide break-throughs for economic and social
COMMONS HAD A STRATEGY for social reform. It consisted of
adaptations of economic institutions in our capitalistic system in
such a way that businessmen and others would have economic incentives
to improve the conditions of the working class. Furthermore, he
believed that reforms could be organized in such a manner that they
would benefit even the employer.
As an example of his method of campaigning for reforms, consider his
efforts to sell "workmen's compensation" coupled with a
safety program. The first step consisted of finding a few enlightened
employers who were convinced of the wisdom of safety programs. These
were published as examples for others to follow, thereby demonstrating
that compensation to injured workmen, regardless of legal obligations,
paid dividends in unproved morale of the workers. Commons then
persuaded the enlightened employers to help him sell similar measures
to other firms. Then when commissioned by Wisconsin Progressives, he
persuaded employers to join with labor leaders on committees to help
in drafting a state law to require all employers to accept his
principles. By giving both sides the impression that some type of law
on the subject was inevitable, he induced them to compromise their
differences. This joint product was then perfected for submission to
the legislature. At the legislative hearings on the proposed law,
both the "enlightened employers" and labor leaders testified
on behalf of his proposals. Their testimony created the impression
that a large group of employers and labor leaders were in favor of the
Finally, after the Wisconsin legislature enacted the proposals into
law, he served a term as one of the commissioners administering the
law. He began the practice of using representatives of both
employers and union leaders on an advisory board to aid in the
administration. In doing this he recognized that the selling of the
program was not over when it became part of the law. He continued to
educate both employers and workers as to the fairness of the program
and the need for successful administration.
Before the success of the Wisconsin program was known, he pushed on
to extend the campaign into other states. Through the American
Association for Labor Legislation, the National Consumer's League, and
the National Safety Council, organizations in which he was an
important pioneer, he joined many others in selling his reform to
In the case of workmen's compensation, the program not only relieved
the injured workmen with compensation, but it also relieved the
employer of liability from potentially expensive lawsuits. The
employer continued to pay insurance premiums, but now he had something
more than mere protection against unpredictable liabilities. He had
die assurance that any of his employees, if injured, would be
Along with the compensation program went an intensive safety program
aimed at cutting premiums for those employers who were successful in
limiting injuries to their employees. At the same time Commons'
precedent-shattering contribution to the law pointed a constitutional
way to permit administrative commissions instead of legislatures to
devise safety regulations. Consequently, with the reduced accident
rates, workmen's compensation insurance would be provided at lower
cost than could the insurance against liability. Thus all concerned
benefited from this reform.
Commons used the same techniques to sell unemployment compensation.
Many of the features of our present program, for good or bad, can be
traced to his concepts and his method of campaigning for it.
Wisconsin's pioneer law set a pattern which could not be ignored when
our national law was formed. Furthermore, many of Commons'
students, including Edwin E. Witte, the Executive Director of the
President's Committee on Economic Security, held key roles in devising
our entire social security program in 1935.
Besides these last two laws, Commons also had a large part in the
preparation of Wisconsin's civil service act, its pioneer public
utility law (which served as a national model), its co-operative act,
its minimum-wage act, and its child-labor law. He helped draft the
national law valuing railroad property, and he served as an expert for
a Congressional Committee studying the banking system.
Commons began as an adviser to Robert M. LaFoIlette Sr., but he
continued on for other Wisconsin Progressives. He served as a
commissioner for Wisconsin's Industrial Commission and for the United
States Commission on Industrial Relations during Wilson's
administration. Besides such participation in government, he was a
professor of economics at the University of Wisconsin. A prolific
writer, he is known more for his contributions to labor economics and
history than for his work in general economics. However, as an
Institutional economist he ranks close to Veblen.
Commons would have the State play the role of the wise and kindly
father. It would jealously guard the welfare of its citizens by
maintaining a healthy economic climate. By monetary means, it would
keep the economy on an even keel. Through all types of trouble, it
would protect the workers by providing them with security of incomes
by means of a comprehensive social security program. Yet, like the
wise father, the State would limit its interference with the
activities of its citizens. It would refrain from imposing such direct
controls as would seriously reduce the area of die citizen's freedom.
He believed that forbearance and the spirit of fair play and
compromise among the people can be used to reduce the amount of
interference necessary. Thus Commons was neither an advocate of State
control nor a defender of laissez-faire. He kept one eye on the future
and one on the continuity provided by the past. He did his best to
hurry along economic evolution to levels of "stability and
fairness to all."
- See my John R. Commons:
His Assault on Laissez-faire (Corvallis, Oregon: Oregon State
University Press, 1962).
- Benjamin Higgins, Economic
Development (New York: W.W. Norton and Company, 1959), p.453.
- Will Lissner, "John
Commons, 82, Economist, Is Dead," The New York Times,
May 13, 1945; Selig Perlman, "John R. Commons," American
Economic Review, Vo.. XXXV, September, 1945; John R. Commons,
Myself, (New York: Macmillan Co., 1934).
- Walton Hamilton, "The
Institutional Approach to Economic Theory," American
Economic Review, May, 1919.
- Wesley C. Mitchell, The
National Bureau's First Quarter-Century (National Bureau of
Economic Research, 1945.)
- David Hamilton, "Veblen
and Commons: A Case of Theoretical Convergence," Southwestern
Social Science Quarterly, September, 1953.
- Thorstein Veblen, The
Theory of the Leisure Class (New York: Macmillan Co., 1899).
- Thorstein Veblen, The
Instinct of Workmanship and the State of Industrial Arts (New
York: Macmillan Co., 1914).
- Thorstein Veblen, The
Theory of Business Enterprise (New York: Charles Scribner's
Sons, 1904), p.256.
- Thorstein Veblen, The
Engineers and the Price System (New York: B.W. Huebsch, Inc.,
- Charles S. Peirce, "How
to Make Our Ideas Clear," Popular Service Monthly,
- John R. Commons, Institutional
Economics (New York: MacMillan Co., 1934), p.153.
- Ibid., p.308.
- John R. Commons, Legal
Foundations of Capitalism (New York: Macmillan Co., 1924),
- Commons, Institutional
Economics, op. cit., p.267.
- Ibid., p.65.
- Commons, Legal Foundations,
op. cit., p.66.
- Commons, Institutional
Economics, op. cit., p.337.
- Ibid., p.684.
- Commons, Legal Foundations,
op. cit., p.90.
- Ibid., p.357.
- Commons, Institutional
Economics, op. cit., p.338.
- Ibid., p. 339.
- Ibid., p.89.
- Commons, Legal Foundations,
op. cit., p.348.
- Harter, op. cit.,
- A.J. Altmeyer, The
Industrial Commission of Wisconsin (Madison: University of
Wisonsin Press, 1932).
- Commons, op. cit.
- Altmeyer, op. cit.
- Edwin E. Witte, "The
Development of Unemployment Compensation," Yale Law
Journal, December, 1945.
- Edwin E. Witte, "John R.
Commons as a Teacher, Economist and Public Servant," Remarks
at the John R. Commons Birthday Dinner, October 10, 1950, Madison,