After several decades of receiving scant attention, the institutional economics of John R. Commons (1862–1945) now appears in the midst of a revival. As one might expect, economists from the United States conduct much of this contemporary research. Perhaps a more unexpected source of such scholarship is Japan, but a team of Japanese economists have been working collaboratively on Commons for nearly a dozen years—and some members of the team have been studying Commons independently for almost twice that long.Footnote ¹

Shingo Takahashi, a professor at Tokyo College of Transport Studies, is among the long-time Commons researchers, and his Transaction Economics of John R. Commons combines new and previously published material (most written in Japanese) into an exceptional and timely contribution to the English-language literature on Commons’s economics and its contemporary relevance. While Commons’s work on labor issues is well known, his institutional economics has always been notoriously difficult to decipher and connect to the rest of his research. Takahashi takes on the challenge of making sense of that institutionalism and placing it at the center of Commons’s body of work, and succeeds admirably, especially when we consider that Commons’s thinking and terminology evolved over the course of his career.

Takahashi organizes the book into four main sections. Part I introduces the core concepts of Commons’s institutionalism, which Takahashi calls “transaction economics”; these early chapters also provide glimpses into Commons’s underlying pre-analytic vision. The discussion of Commons’s core concepts begins with the transaction, which is broader than the exchange concept in conventional economics. Transactions can involve individuals or organizations, and they always involve expectations about the uncertain future.Footnote ² To reduce that uncertainty, organizations—including societies—create institutional arrangements and judicial systems, enabling us to have confidence in our expectations.

Three distinctive types of transactions are identified by Commons: bargaining (which transfer ownership), managerial (such as workplace commands), and rationing (organizational decisions on the allocation of resources and distribution of wealth creation). Even bargaining transactions differ from the market exchanges in mainstream economics because in Commons’s economics, the scarcity, utility, and productivity considerations embedded in standard theory are now recognized as shaped and supplemented not only by expectations but also by customs (conventions that reflect a group’s ethics) and the powers and policies of the state (sovereignty), including those that enforce economic rights.Footnote ³ In other words, Commons saw the transaction as a foundational economic concept, but each transaction also has an ethical and legal dimension. Thus, the pre-analytic vision of Commons’s economics involves not an invisible hand and natural selection but rather the “visible hand” of collective action, which involves choices that Commons described as “artificial selection” (quoted in Takahashi, p. 20).

Part II addresses the microeconomics of pricing and the macroeconomics of business cycles. Business pricing in Commons’s analysis involves setting prices so the two sides of every corporation, the going plant and the going business, operate in a coordinated matter. This is achieved by aligning all three types of transactions with the aim of achieving expected profits.Footnote ⁴ Raising prices is one lever available to influence profitability, but boosting plant efficiency and reducing production costs are others. Of course, plant efficiency depends on technology, but it also depends on labor-management relations because positive employment relations foster goodwill, a form of intangible capital that enhances both efficiency and expected profitability.Footnote ⁵

Business cycles also center on the aim of achieving expected profits, but here there’s the additional element of cumulative causation. Favorable profit expectations, given the market interest rate, will increase business borrowing and investment, which increases aggregate demand, validates the initial expectations, and raises asset prices, leading to more investment and an even greater reliance on debt. A downturn works cumulatively in reverse, starting with the failure to realize expected profits. From Commons’s perspective, the key to avoiding a crisis during an expansion is the same as the way to put the brakes on a contraction: stabilize expectations, which underscores the vital role for government in macroeconomic stabilization.

Part III digs deep into the role of the state in fashioning appropriate stabilization policies. Commons saw monetary policy and labor policies as contributing to macroeconomic stabilization. He emphasized the need for active central bank use of open market operations to stabilize the average price level, consistent with the US Federal Reserve’s contemporary focus on the producer price index, grounding his position in a credit theory of money and the endogenous cycle theory it supported. But in recessions Commons also saw a need for government to create new purchasing power for workers by augmenting public spending: “In order to create the consumer demand, on which business depends for sales, the government itself must create the new money and go completely over the head of the entire banking system by paying it out directly to the unemployed, either as relief or for construction of public works, as it does in times of war” (quoted in Takahashi, p. 73).

Unemployment insurance is also a labor policy intended to promote macroeconomic stabilization: the sort of system Commons had in mind doesn’t merely compensate the jobless (thus helping to stabilize consumer demand); it also aims to discourage business layoffs by using an experience-rating mechanism to determine business contributions to the system.Footnote ⁶ Takahashi stresses that hardship prevention was a key part of Commons’s approach to labor policies, including his approach to workplace-related illnesses and injuries. Prevention fosters economic stability but also induces goodwill among employees and employers to the benefit of all parties including the public at large, and Commons took an additional step by arguing that the formation and administration of such policies should involve participation of labor and management representatives—through their involvement in administrative commissions—to further promote such goodwill.

Part IV introduces Commons’s notion of “reasonable value” to consider the entire socio-political character of economic systems. Takahashi correctly identifies an evolution in Commons’s use of the term “reasonable value,” initially using it to mean “reasonable price” and later to mean “reasonable policy formation,” which we can also view as the socio-political character of Commons’s preferred type of economic system—reasonable capitalism. Takahashi also shows that Commons’s transaction economics can be applied to account for fascism and communism as well as various forms of capitalism.

Takahashi demonstrates the applicability of Commons’s economics to different economic systems by highlighting three types:

• • Autocratic: A fascist or communist dictatorship governs without regard for custom and legal precedent; cooperation and consensus are coerced; and the duty to society takes precedence over the right to individual action. Government decrees and taxes are used to control prices and impose rationing on plant and business operations. The system does not merely lack freedom; it also lacks stability because such a system leads inevitably to power struggles.

• • Democratic capitalism: Democratically elected government representatives form policies by means of persuasion, voluntary cooperation, and log-rolling, but the activities of lobbyists play an outsized role in policy formation, which often prioritizes the rights of large corporations or other interests with financial power. As a result, although the socio-political makeup of the economic system begins as driven by rights, not duties, the system eventually tends toward unfair competition (industries dominated by firms with monopoly power) and widening income inequality, and the political system tends in the direction of “bossism”—perhaps even evolving into something more autocratic than democratic.

• • Reasonable capitalism: Democratically elected representatives of all interested parties work directly with research-based administrative commissions to shape and administer public policies. The aims of such work include giving attention to both the rights and duties of individuals and groups while fashioning equal opportunity, fair competition, and equality of bargaining power; promoting collective bargaining within enterprises and industries, and, in turn, enhancing goodwill between business and labor; and fostering a virtuous cycle of macroeconomic stabilization oriented toward crisis prevention, productivity enhancement, elevated business ethics, and economic innovation via trial and error. The Supreme Court has the final say, but its decisions must be based on due process and “bound by codified law, custom, and precedent” (p. 123).

Takahashi’s final chapter makes only a brief mention of the relevance of Commons’s transaction economics in our time, particularly by suggesting that it offers a way to preserve capitalism and democracy. But this reader sees striking similarities between the postwar American economy and this book’s “democratic capitalism,” and between the current new regime in Washington and an “autocratic” system. By offering the alternative of “reasonable capitalism” at this moment, research in the history of economic thought could not be more relevant to the present.

Even if the current situation in the United States were not so alarming, Transaction Economics of John R. Commons would still warrant considerable acclaim. Takahashi adroitly weaves together the pieces of Commons’s economics by means of not only a steady narrative but also accompanying diagrams that link the theory’s various elements (each chapter adds a bit more to the complex chart that emerges by the book’s conclusion). Also, in addition to meticulously presenting Commons’s ideas, Takahashi shows (in Part IV) the extent to which similarities and differences appear when those ideas are compared with concepts and analyses in the work of several “new” institutionalists, including Oliver Williamson, Mancur Olson, Douglass North, and Elinor Ostrom. While Ostrom seems to have captured important aspects of Commons’s conception of going concerns, Takahashi writes that the others are separated from Commons by their focus on autonomous, rational individuals and the aim of reducing transaction costs.

Moreover, Takahashi gives valuable attention to Commons’s work on money, business cycles, and macroeconomic stabilization. These are underexplored aspects of Commons’s economics, and here again the author offers us not only Commons’s contributions but also a look at how they compare with those of others—in this case, Commons’s contemporaries Thorstein Veblen, Wesley Mitchell, and John Maynard Keynes. While the entire book is suitable for graduate students and scholars seeking to understand Commons, historians of economic thought unfamiliar with the monetary macroeconomics of Commons will likely find the cycle and stabilization chapters of particular interest.

The only weak spot in Transaction Economics of John R. Commons is that Takahashi doesn’t take on the question of how we get from a corporation- or banker- driven form of democratic capitalism, let alone an autocratic variant, to reasonable capitalism. It’s often said that Sir Winston Churchill once remarked, “Americans can always be trusted to do the right thing, once all other possibilities have been exhausted.” But the question one would hope a book subtitled Towards Reasonable Capitalism would at least ask is: How can we get there from here?

My own reading of Commons suggests he had no easy answer. One might think such a transition would require political mobilization by workers in the form of labor unions, but early in his career Commons worried that unemployed, financially insecure, and demoralized workers would be mobilized not by unions but by a demagogue (Commons Reference Commons1908, p. 763), and upon his retirement nearly three decades later Commons fretted that American capitalism was moving toward fascism because business leaders had no interest in the “organized equilibrium of equality” at the heart of reasonable value (Commons Reference Commons1934a, p. 902; Reference Commons1934b, p. 73).

Of course, it isn’t the responsibility of historians of economic thought to solve such challenging practical matters, but it is a bit of a disappointment that Takahashi doesn’t discuss the extent to which Commons addressed this crucial issue. Still, by making Commons’s institutionalism coherent and comprehensible, Transaction Economics of John R. Commons puts the reasonable value alternative on the table for us to consider in these troubling times—and that is an important contribution. Takahashi’s work inspires hope that the revival of interest in Commons may just be beginning.