Ronaldo Fiani Comments on Prof. Hodgson s The Evolution of Institutions: An Agenda for Future Theoretical Research Ronaldo Fiani 1 As always, Prof. Hodgson s contribution is at the same time original and provocative. The questions he raised in his paper are relevant indeed, and they belong to the core of institutional economics. Prof. Hodgson s nonconformist approach should be welcomed for the intellectual stimulus it provides since his arguments are rigorous and pertinent, and institutional as well as evolutionist economic analysis have benefited very much from his works. This paper now is another important contribution and we surely agree with its basic ideas. However, some aspects of Prof. Hodgson s arguments perhaps may be pushed a little farther. Prof. Hodgson first discusses the methodological approach that takes for granted that individuals create institutions at will without considering previous institutional support or constraint. This is an almost axiomatic starting point for much of the so-called New Institutional Economics as the works by O. Williamson illustrate quite well. Hodgson argues this idea of individuals logical precedence over institutions very convincingly. In fact, human beings cannot be conceived of as anything but socialized individuals and so the idea of individuals creating institutions in an institutional vacuum misrepresents reality. It does not mean that individuals cannot create institutions, it means that they do it with the help of other institutions as well as constrained by them. Prof. Hodgson calls the infinite regression of institutions the basic fact that one cannot explain some particular institution without considering other institutions as well. Prof. Hodgson then stresses the importance of habits to institutional stability and there is a clear link here to Veblen s ideas. 135 1 Professor Adjunto Instituto de Economia da Universidade Federal do Rio de Janeiro. E-mail: fiani@ie.ufrj.br. tel.: (55)(21)3873-5246.
Comments on Prof. Hodgson s The Evolution of Institutions 136 Veblen deserves more attention from modern researches than he usually gets, as his concepts and analysis may be really useful to some analysis of modern institutional economics. But there is another point here that I would like to explore. If we accept (and it is my opinion that we should) that there is a downward causation from institutions (through habits) to individuals preferences, we should try to understand the interplay between this downward causation and what Prof. Hodgson has himself called the upward causation (HODGSON, 2001, p. 291), this one meaning the creation of new institutions by individuals according to their preferences with the help of and constrained by other institutions. Let us consider in more detail the relationship between habits and institutions as Prof. Hodgson analyses it. Prof. Hodgson more extensively states the relation between habits and individual action in his book How Economics Forgot History (HODGSON, 2001): All conscious deliberation depends upon latent habit and unfathomable tacit knowledge. Many of these habits are themselves acquired tacitly, in interaction with others. By acting not directly on individual decisions, but on habitual dispositions, institutions exert downward causation without reducing individual agency to their effects. (p. 291) It is clearly stated in the passage quoted above that downward causation does not mean that individuals are like puppets being manipulated by institutions. Discussing the interaction among stipulated rules, customs and habits, Prof. Hodgson then states that: Human nature and instincts provide the grounding for habits and customs. In turn, habits and customs are the foundation for deliberation and the formation of explicit rules. Institutions are thus formed, which help preserve and reproduce these habits of thought. There is both upward and downward causation. Most obviously and importantly for our purposes: new rules can give rise to new habits. (HODGSON, 2001, p. 295)
Ronaldo Fiani So it is true that while sometimes individuals conform their preferences in harmony to the existing set of institutions (downward causation), there are also occasions when they replace previous institutions by new ones (upward causation). It would be very interesting to consider the study of the factors that may weaken institutional conformation of individuals preferences as an element of an agenda for future theoretical research on institutions: what makes individuals perceive the opportunity to replace the institutions that had until that moment directed their actions through their habits of thought? Perhaps some elements to answer this question can also be found in Veblen s work. Let us return to Veblen s ideas as he exposed them in his most famous book, The Theory of Leisure Class (VEBLEN, 1994). In Veblen s approach institutions are supported by habits: institutions exist only to provide for the regularity of the actions of individuals, and this regularity exists because individuals are simply accustomed to it. In addition, for Veblen institutions tend to adequately reflect habits, what contributes to support and to consolidate institutions themselves in a self-enforcing feedback. According to Veblen s view, technological change is the factor disrupting that self-enforcing feedback, and it is worth mentioning that Veblen conceived technological change in a very broad meaning: it could encompass not only inventions but also changes in industrial organization, demographical growth and growth in the body of knowledge. Such changes would create new forms of social organization in economic activity and these, on their turn, would change the way people used to live. Veblen sees such changes as having a very important consequence, since the previously existing habits of thought of individuals would be no more adequate to the new situation: individuals would try to update their concepts and habits of thought to the new environment and in doing so they would develop new habits and so new institutions through a spontaneous process. Of course, for Veblen economic pressure from the basic needs of life would play an important role in compelling people to update their values and preferences. 137
Comments on Prof. Hodgson s The Evolution of Institutions 138 So far the process of institutional change seems a rather smooth one. But Veblen (1994) suggests that the process may face resistance. Technological change means that some groups may lose their privileged status in the social structure if the change goes on. So they will fight to prevent any changes that may threaten their social status. Now we have an interesting question: how will the privileged groups try to prevent changes? Veblen (1994) suggests that they may effectively prevent changes inducing other groups to reproduce their own values and preferences and so getting ideological support from these other social groups, which can be even weaker ones. Of course this ideological method of preventing changes is a real possibility, but it seems excessively time-consuming and indirect to be the only one to rely on: this may work very well in the long run, but sometimes technological changes are dramatic and some immediate response may seem more appropriate. That immediate response is political action: privileged groups usually have better access to the State and they may use the State s monopoly of coercion to accomplish their ends. While Acemoglu and Robinson (2002) arrive at interesting conclusions modeling this idea and discussing historical evidences of privileged groups trying to prevent economic changes, much more work is necessary to improve and develop all the farreaching institutional consequences of this idea. To return to the discussion of upward and downward causations, when technological change takes place it weakens downward causation, for existing institutions no more seem capable of influencing individuals habits of thought, and individuals most likely will try to develop new habits and so new institutions. In other words, a movement of upward causation begins to work. But from what we have discussed so far it must be evident that this change from downward causation to upward causation should not be considered as something mechanical, as if it were part of a cyclical movement from downward causation after disturbance to the upward one, and then back to downward causation again as disturbance ceases to exist and new institutions consolidate. Politics may become an exogenous and decisive element to disturb the illusory symmetry of this cycle.
Ronaldo Fiani We should study the specific circumstances, which may render possible for the privileged groups to prevent changes. In our opinion, this is a relevant issue to be considered for future research in institutions. This question above brings us to the second point we would like to discuss in Prof. Hodgson s paper: the institutional role of the State. Contrary to some well-known approaches to this issue it is shown that the State is a fundamental player. As Prof. Hodgson remarks, Individual property is not mere possession; it involves socially acknowledged and enforced rights. The State as monopolist of coercion is naturally the agent assigning and enforcing these rights. But Prof. Hodgson warns us that the State will assign and enforce rights accordingly to its own objectives and so the State can appropriate as well as protect private property. Then, private property s reassurance would depend on the nature of the State itself: the more pluralistic the State, the more secure is private property. Questions about State s institutional role are very interesting indeed and should be considered for future research. The way economists have been dealing with the institutional role of the State has been up to now unsatisfactory. In one of the recent and most important efforts to understand the institutional role of the State, Nobel Award D. North developed his neoclassical model of State, which depicted the State as a kind of discriminating monopolist granting rights in exchange for fiscal revenue (NORTH, 1981). North later rejected (NORTH, 1990) this neoclassical model of the State as being too simplistic to analyze modern democracies with complex networks of political institutions, where political bargain involves legislators as well as interest groups. Knight (1992) criticized North s approach on different grounds. Institutions would not be determined by the effort to reduce uncertainty in human interactions: economic and political institutions would be the result of political bargain among groups with distributive purposes. Knight s criticism brings to the forefront the political processes through which economic institutions are created. But we must be careful when we talk about institutions created by the State power, as Prof. Hodgson has warned us. The simple existence of a law regulating 139
Comments on Prof. Hodgson s The Evolution of Institutions 140 something does not necessarily mean that it has an institutional value. People s habits are an important supporting factor for any formal decree. Quoting Prof. Hodgson again: The formal declaration of a law is not enough to make it a reality. Legal rules and structures have analytical and taxonomic weight only when the laws are effective and enforceable. They do not matter most when they are mere legal declarations, unrooted in the customs and observances of the people. (Hodgson, 2001, p. 302) To support this qualification, Prof. Hodgson cites some examples of laws that were formal and empty rules with no real effect, as the free speech constitutional right in the former German Democratic Republic and the legal prohibition of social caste discrimination in India since 1948. We absolutely agree with Prof. Hodgson that formal laws and rules unsupported by people s habits are fated to become ineffective and sometimes even a matter of ridicule. Third World countries are full of examples of State laws and rules that have become a matter of scorn. But we believe that a more thorough explanation of why some laws are effectively enforced and why some others are not is necessary. In order to recognize the missing explanatory elements, it is now necessary to consider in some detail the relevance of political process to institutional analysis, as long as institutional analysis is concerned with formal and legal institutions created by the State. The acknowledgement of the relevance of political processes to institutional analysis raises questions that political scientists have been working on for a long time. Migdal s investigations (1987, 1988) are particularly interesting to understand the regulatory successes and failures of the State, when he discusses the reasons why some States seem to be strong enough to implement their rules while others have to accommodate with almost all of its pressure groups and regional leaders. His research points to two different factors. The first two factors are the incessant competition between the State and other political organizations to establish their political dominance and the resources the State may use to compete. Contrary
Ronaldo Fiani to North s earlier view, the State is not necessarily the single ruler: it has to fight for political power against other political organizations or regional political leaders, remarkably in the Third World. Simultaneously, States are inserted differently but necessarily in economic and political international arenas. It results in relations of trade, borrowing, factor movements, political commitments, etc, that affect not only the social structure in each country, but also the constraints the State faces and the resources it has to act politically. Thus State s resources (when compared to the resistance it may face against its resolutions) along with international commitments and obligations define the conditions for State political action. These conditions will set the first requirements for any social group to successfully use State s coercion power to achieve its ends. But even when these conditions for an effective State s interference are satisfied there are still some occasions when legislators do follow their own objectives, and it is not clear when legislators will have to serve the demands of interest groups and when they will be free to follow their own preferences. This would be a first question about the State to be added to Prof. Hodgson s agenda. Secondly, even if we exclude from consideration non-privileged groups, any minimally developed society will have several groups among their privileged ones: what determines which group will be served? The two questions above directly answer the question about the possibility of a privileged group preventing economic change. If legislators could follow their own objectives it would be very difficult for a privileged group to prevent economic changes (at least if these changes were not unwanted by legislators themselves). Even if legislators have to listen to privileged groups, it is not evident which one they will satisfy. Let us recapitulate the two themes we think should be added to Prof. Hodgson s future research agenda: 1. The study of the interplay among downward causation, upward causation and political interference. 2. The necessary conditions for privileged groups to prevent economic changes through the use of State s coercion. 141
Comments on Prof. Hodgson s The Evolution of Institutions 142 The conditions above should identify: (a) when international obligations or resource limitations are not constraints to State action; (b) when legislators are not free to follow their own objectives but must obey to privileged groups and (c) which privileged group the legislator will comply with. Of course this research agenda means a drastic theoretical departure from the orthodox one, a departure that already takes place in Prof. Hodgson s paper. We must admit the unsatisfactory state of mainstream economic knowledge as a tool to analyze the role of institutions in economic systems. But we should consider the possibility of extending the scope of this research agenda beyond the direct refutation of orthodox canon. We should consider which elements should be incorporated in order to renew the economic approach to economic institutions, even if those elements are not present in conventional economic theory. That is our next and last remark. The above themes probably will require some exchange of ideas between economists and other social scientists, especially political scientists. Economists (with rare exceptions) have been unaware of the role of the State in market functioning through property rights assignment and enforcement. In our opinion, Prof. Hodgson s paper tries to draw attention to this important issue with a correct approach. But perhaps it is time for economists developing institutional researches to consider more seriously the possibility of getting inputs from other social sciences. Prof. Hodgson s brilliant paper encourages us to think that considering institutions with the habits they promote and the necessary intervention of the State may require a larger integration among the social sciences. References ACEMOGLU, Daron and ROBINSON, James A. (2002) Economic Backwardness in Political Perspective. Cambridge, Mass.: NBER Working Paper 8831, 2002.
Ronaldo Fiani HODGSON, Geoffrey M. How Economics Forgot History: the problem of historical specificity in social science. London: Routledge, 2001. KNIGHT, Jack. Institutions and Social Conflict. Cambridge: Cambridge University Press, 1992. MIGDAL, Joel S. Strong States, Weak States: Power and Accommodation. In: M. Weiner and S. P. Huntington (eds.), Understanding Political Development. Glenview, Illinois: Scott, Foresman & Co, 1987, pp. 391-434.. Strong States and Weak States. Princeton, New Jersey: Princeton University Press, 1988. NORTH, Douglas C. Structure and change in Economic History. New York: W. W. Norton & Co, 1981.. Institutions, Institutional Change And Economic Performance. Cambridge: Cambridge University Press, 1990. VEBLEN, Thorstein. The Theory of Leisure Class. New York: Penguin, 1994. 143
Comments on Prof. Hodgson s The Evolution of Institutions 144