In the late 1870s and 1880s young American economists were returning from graduate training in Germany with ideas and approaches that they developed into a school of thought that came to be known as institutionalist economists. In 1885 the thirty-one-year-old Richard T. Ely of Johns Hopkins University led a group of these economists in founding the American Economic Association (AEA). The AEA quickly became (and remains) the leading professional organization of economists, but among its original missions was to organize economists opposed to laisez-faire ideas.

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Ely and his compatriots saw themselves as a “new school” of dissenters from classical or neoclassical economics and from the doctrine of laissez-faire. Ely wrote in 1886 of “the controversy between the economists of the old school,” meaning the classical and neoclassical economists and defenders of laissez-faire, and the economists of “the new school in America,” meaning the institutionalists and Progressives like himself. He described the “new school” thinkers as scientific truth-seekers whose historical investigations had uncovered the benefits of labor unionization and strikes, had found in socialism “important and fruitful truths which have been unfortunately overlooked,” and had “overthrow[n] many cherished dogmas” of orthodox finance… Ely elaborated the same theme at greater length in an 1884 monograph, where he explicitly tied the new school in America to the teachings of German historical economists.