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has reached increasing levels of acceptance among social scientists. The rise of the new institutionalism can be seen as a historical modification of rational choice perspectives that became fashionable in the social sciences starting in the 1970s, though the two perspectives are intimately linked to the "behavioral revolution" of a decade earlier. Any political scientist who consults the leading journal of the profession (in terms of overall reputation and difficulty of publication), the American Political Science Review, will find him- or herself inundated with rational choice perspectives. Political scientists, then, seem to be moving in the direction of attempting to found a "scientific" basis to their art, just as economists did earlier in the century. The basis of this revolution is attractive in the sense that rational choice perspectives seem to allow for a "universalization" of individuals' political actions, just as a market-based model allows for the aggregation of individuals' economic behavior. More importantly, rational choice models also seem to allow political scientists to come closer to the scientific "holy grail" of the social sciences, namely some measure of predictability of behavior. However, despite some clear, albeit limited, successes in terms of voting behavior models, this ambitious endeavor has faced important theoretical obstacles that are helping to prevent its universalization as a political science model. While these problems have been discussed extensively elsewhere,  let us remind readers of just a few: precisely defining interests, when both material and non-material influences create them; explaining the effects of identity, culture, and politics on interests and decisionmaking; and last but not least, explaining the dyna mics of decisionmaking. The argument of this commentary is that the new institutionalist perspective in economics only partially solves some of the problems of the rational choice perspective. More importantly, we suggest that, ironically, the new institutionalism's salving modifications of rational choice actually bring up the most important arguments against it. II New Institutionalism's Attempt to Save Rational Choice
"  By contrast. constraining future choices.e. and affecting the courses of societies. the importance of historical context).  Differences in . for North an institution embodies and guides patterns of behavior. North points out that some of the standard and necessary assumptions of rational choice models are questionable. the new institutionalism draws greater legitimacy because of its roots in (traditional) neoclassical economic theory. The new institutionalism focuses on the central assumption of zero transactions costs in neoclassical economic models as the main gap to be filled.  Unlike standard neoclassical models. problems in the formulation. and processing of subjective probabilities in uncertain choices" also exist. one that considers cultural and political factors of motivation. the new institutionalists wish only to modify the rational choice. evolutionary economics. patterns of behavior develop. interaction. He notes that preferences are not always transitive (their intensities change over time and they are not in a stable order over time). utility-based neoclassical model by relaxing some of its assumptions. institutions are considered to be independent variables in their own right. Through institutions. preference reversals ("where the order of the choices on the basis of their reported values contradicts the implied ordering in direct choice situations") and ". "Old" institutionalists believe in path dependency (i. Rather than seeking to replace neoclassical economics. and that "framing effects" (in which alternate means of presenting a problem result in different choices). .  Douglass North. . a recent Nobel Prize winner (1993). North suggests that institutions consist of these regularized interactions. history makes its impression on society. that is. manipulation. Institutionalists of the old school are now branded by mainstream economists "as whimsical advacates of an unrealistic and basically empirical research programme which posed no challenge to the classical or neoclassical hegemony. New institutionalists therefore seek to integrate institutional analysis within a neoclassical economic framework and to include institutional change as an important variable to be studied. and organization. limiting individual rationality. the autonomy of institutions." or the constraints that shape human interaction.  North defines institutions as "the rules of the game in a society.  Given the incompleteness of information and the need to develop regularized behavior in the face of an ever-changing reality and largely unique situations. and a holistic approach to economics.INSTITUTIONALISM AS A BRANCH OF ECONOMICS dates back at least to the beginning of the twentieth century. is the most important proponent and theoretician of the new institutionalism. In other words.
by exploiting the margins of institutional frameworks. or the ability to enforce them at low cost. why some countries enjoy higher stand ards of living than others. By implication. Adequate enforcement allows for elaborate contracts. is a principle cause of underdevelopment. in many cases.  Therefore. are the primary reasons for differences in economic outcomes. and are formed within an existing institutional framework. is the need for selective incentives and enforcement.  One aspect of this. Nonetheless they act as agents of institutional change. as well as collective action theories. how transaction costs are handled by societies plays a major role in determining the societies' economic growth rates. then.institutions. which explains.  .  For the new institutionalism. Ronald Coase explains that firms internalize some of the normal market transaction costs. such as uncertainty and lack of reputation. Incentives and enforcement ensure compliance with institutional rules. New institutionalists believe that changes in the institutional arrangements of property rights can have profound effects on ec onomic outcomes.  Organizations have different objectives. the establishment and enforcement of private property rights are vital to the costs of transaction and to providing the security needed for longterm investments. waiting costs. that exist between independent actors and agents. in line with their different "mental models. Armen Alchian and Harold Demsetz use the enclosure acts in Great Britain as one example. Perhaps the most important factor affecting transaction costs is the nature of property rights in a society. The absence of property rights. ceteris paribus. According to North. but may. The new institutionalism gives economic (rational) reasons for the existence and role of institutions in societies--namely. are vitally important in order to ensure low-cost transacting. risk costs. common to most collective action theories as well as to institutionalism. Organizations are groups of individuals bound by a common purpose to achieve objectives. which are public goods.  Transaction costs cover a wide variety of other costs of production and sales that are normally assumed away in standard economic theory. and the costs of retailing or using a middleman. moreover. some institutions in some countries are more efficient in reaching social outcomes. information on violations and the need for mechanisms of efficient punishment." but the most important cue for their behavior is the incentive structure set up by institutions. prove significant to the ultimate price of the good. The costs that are identified most frequently as transaction costs are information costs. to reduce transaction costs by internalizing them and by setting up standard rules of action.
and the effects of culture and ideology in shaping preferences. as the central provider of economic rules and their enforcement. not simply personal preferences. which might explain why short-term irrational choices are made. the mortality of both the rational choice model and the new institutionalism can be pointed out by examining any of the more ambiguous factors of human behavior that the new institutionalism . The danger in this approach. rather than being a unique outcome of concluded bargains. It is therefore able to shape the maximizing preferences of organizations as well as itself being shaped by their behavior. the value and importance of stable rules for behavior.  The new institutionalist school seems to solve several problems of the rational choice model without destroying its primary structural foundations. Each event is affected by its antecedents. and by developing reputations for power. so that political decisions may be temporary compromises rather than negotiated decisions. becomes a crucial actor in this scheme. Institutions shape decisions by presenting a restricted set of policy alternatives to leade rs. Symbols are. indoctrination. History. affect "the duty" of political intercourse. and that ensure political stability through shared meaning and consensus." III The New Institutionalism: How Its Explanation of Change Brings Out Its Own Weaknesses IN FACT. rather than being a medium where diverse interest group coalitions are formed and negotiate. rather than simply reflect it. Preferences and meanings thus develop over time. [Preferences] are neither stable or exogenous. since these rules affect reputation. Bargaining may be continuous." Another important modification of rational choice perspectives is that the new institutionalism views leaders as transforming preferences and coopting other leaders into new beliefs and commitments. affecting the rules of the political and economic interactions and contracts. of course. is that the bandages applied here may actually point to fatal weaknesses in the rational choice model." Political actors consider institutional rules in making their decisions. rather than salving a few wounds or "anomalies. For the new institutionalists. "through a combination of education. shared rituals that affect and are affected by behavior and political meaning. rather than simply brokering coalitions. The autonomy of institutions means that they are able to affect the distribution of resources. with conflict deferred. furthermore. the state is an autonomous entity. and experience. we add the interesting factors of path dependence (history). thus leading to "path dependency. While we retain the image of autonomous individuals pursuing their interests. or the rules of experience.The state.
In other words. the feedback process. have sources unknown to North. and perhaps increase. resulting in innovative change. in this case the state. institutions change in reaction to new economic factors.  The problem here is that the institution itself.seeks to incorporate via the medium of institutions: culture. or even the autonomous acts of repression of a state upon powerful interest groups? In other words. ideology. North postulates that violence due to the inability to compromise may result from the lack of mediating institutions. The second is the feedback process by which individuals perceive and react to changes in the opportunity set. are exogenous to the model. The new institutionalists explain institutional change in two ways." He also postulates that change may be continuous or evolutionary and discontinuous or revolutionary. entrepreneurs (who can be either organizations or individuals) exploit openings within the institutional system. however. For example. how could we explain a violent change in the state or in the bargaining within a state. however. how the new institutionalists explain changes in the "rules" themselves is crucial to explaining the sources of independent power of the rules and the institutions that embody them. results in . North believes that there are two main factors in understanding the dynamics of institutional change. namely how it explains change. irrationality. limited degrees of freedom of political representatives from their constituents. Second. the sense of the first relationship is that organizations optimize in accordance with their environment. is given a monopoly of violence in order to enforce contracts and/or compromises supposedly freely entered into by the interested parties-a self-contradiction. "Broad based support for violent action requires ideological commitment to overcome the free-rider problem. Both types of changes affect the bargaining power of interested parties. The second factor. We will present just one critique of the new institutionalism based upon this last factor. though the latter is usually related to the former. Changes in relative prices and tastes affect incentives. Changes in tastes. The ultimate sources of change in these factors. The first is the symbiotic relationship between institutions and organizations revolving around the incentive structure provided by the institutions. those subsidies.  First. steel companies in a country that receive subsidies for hiring personnel hire more employees and spend part of their subsidy to lobby institutions to continue.  In fact. and the inability to form a winning coalition. thus changing the institutional contracts among them. From this perspective. Relative prices are held to result from changes in factors or productivity. reflected in changes in relative prices and tastes. or history.
For example.  Entrepreneurs exist because of the transactions costs for information between individuals and their true optimization strategy. Individuals attempt to modify the institutional system at the margins in order to improve their outcomes. the new institutionalists must explain why some societies. North uses the example of property rights. In simpler terms. which allow for patents to show how innovation is incentivized. thus demonstrating entrepreneurial potential). resulting in a more or less stable hierarchy of successful and unsuccessful countries (in terms of economic growth). the incentives to innovate. which are critical to economic growth.  However. is thus responsible for underdevelopment.  In other words. such as the fall of the Eastern Bloc or even just the overthrow of a ruler. do not simply imitate the more optimal institutions of their successful peers in order to approximate those rates of economic growth. The fact of the matter is that changes may come from groups outside the system. The lack of an environment which encourages innovation and cooperation. or simple resistance. Marginalized groups. Instead. In summary. Therefore. manifestations. are positively or negatively affected by the institutional environment.entrepreneurial activity producing incremental change in the institutional framework. Third World governments have been able to liberalize their economies over the last two decades. At the same time. in recent decades. In this case. along with path dependence. We need to know when and how such changes occur to understand this factor. individuals maximize their opportunities in a system given limited information (and some individuals are able to discern more opportunities than others. in the process altering the framework itself." but do not specify exactly how it works. also been under pressure from previously marginal groups . over time organizations and individuals act more efficiently in an institutional framework. income and growth differentials persist over long periods of time. seeing the inefficiency of their own institutions. the main partners who are interest group foundations of the existing institutional structures can change in identity. or power over time. Finally. interest. Third World military governments and dictators have. sudden changes often occur in spite of (or outside of) institutions and the incentives they supposedly center around. can make claims upon the insti tutions of a society in the forms of informal lobbying. either created by the rules or exogenous to the system. new institutionalists invoke "path dependency. the institutional structure can affect the degree of risk that entrepreneurs are willing to take and the amount of attention paid to advancing knowledge in the society as a whole. despite the heavy losses to the previously protected domestic partners that this change entailed.
such as "the mothers of the disappeared" in Argentina. For the latter. though in the organization-national relationship rather than in the individualorganization nexus. changing the claims and expectations of "normal" and institutional behavior.S. rather than productive.  Organizations in this environment will maximize in ways unproductive to the society's long-run interest. North means that people judge the system to be fair. however. These oppositions open the way for continual dynamism in living rules--we . of course. the school of thought seems to fall short. The new institutional model also ignores ubiquitous exogenous shocks such as economic crises. For instance. as well as state-led stagnation in Latin America and Africa. Here too. hence lending an informal stability to the formal rules and reducing the collective action problems. In other words. and Western E uropean economic growth." Moreover. there are always oppositions between formal and informal acceptance of the rules of a game. organizations always improve in efficiency. The overarching question of change lies. the new institutionalists attempt to explain change as the result of entrepreneurship. such improvements translate into increasingly dysfunctional social outcomes. North refers to the needs for transparency and accountability in reducing the information costs of the voter. lead us to conclude that the sources of change differ from society to society and from situation to situation. This scenario. or even the introduction of new technologies. given resource and status hierarchies. if anything. In North's model. However. The example of state-led development in East Asia as opposed to private sector leadership in U. the identity of gender has undoubtedly changed over time.(outside of the institutional structure). changes in decision-making processes of institutional structures.  yet in an unproductive framework. monopolistic. and states as embedded in culture a set of focal points or rules promoting change in certain directions. North states that there are two fundamental challenges in creating efficient institutions: aligning informal with formal constraints and "creating and maintaining a polity that will support adaptively efficient institutions. The model ignores basic changes in primary identities as well. the opposite is probably true. The diminution of labor as a factor throughout the world economy defies simple explanation by evolutionary trajectory. and opportunity-restricting activities. of course." By the former. is analogous to the problems presented by collective action. i n the new institutionalists' explanation of economic growth. North believes that the Third World is generally characterized by an institutional framework that favors redistributive. we would contend that. In sum. most Third World countries can hardly be characterized as having excess redistribution of assets. there is no one set of rules or focal points we can identify as inducing "productive change. competitive opportunity-creating ones.
Especially important here is the downplaying of the role of . would seem to be especially challenging to North's gradualistic approach. government both at home and abroad. in the nineteenth century. it also suffers from a variety of natural and external pressures. the new institutionalism also underestimates the importance of personality. and the power of organizations to change it. Underlying these uncertainties is the problem of defining an institutional framework. which opens the way for marginal exploitation of what is "legitimate. or working in "the margins.S. as in the case of the East Asian miracle economic growth. for example. In emphasizing the "rules of the game. we cannot reach any clear conclusion on this matter. One person." the new institutionalism fails to explain exactly what is the relationship between organizations and the institutional framework. Sudden changes in economic welfare or in institutions. We should say instead it is a combination of power and entrepreneurship that leads to changes in the rules of the game.S. In some cases in history. to natural resource development. onto the present ideology of people. or the stability as a prerequisite for growth? Even only examining Western long-term economic growth as the new institutionalists do. he leaves aside the problem of acceleration of changes. and constraints on action may equally depend on other factors." or the constraints of history." On a more superficial level." the new institutionalism underplays the importance of power. seem to have profound effects in leading to other movements for change and in affecting or constraining the process of future institutional change. In addition. Another problem in operationalization is defining social goals in ord er to determine the (dis)functionality of an institutional framework. and to external constraints. such as the international environment or public opinion. such as the foundation of the abolitionist movement in the U. even in the evoked case of change by organizations making new demands on institutions. Moreover. can make an enormous difference in economic outcomes without being a policy entrepreneur. probably has institutional and organizational weaknesses. Organizations probably have differential influence on different issues. such as Park of South Korea or Pinochet of Chile. One example of this type of change in the long run is the effect of the Vietnam War on the symbolism of the U. small changes. Perhaps one should also extend "path dependence. such as floods and commodity prices. and prestige in manipulating or ignoring those rules. In line with this example is the problem of cataclysmic change. its staying power. The rate of change is yet another problematic feature. how do we know which comes first: economic growth leading to cooptive stability and acceptance of the rules of economic behavi or.live in a world of contradictions. position. While Bangladesh. and in fact.
 The view of culture as "a series of focal points" hardly does justice to the many and ambiguous ways in that culture is defined. "Rather than viewing institutional change as a way of implementing technical change. Finally. increases in knowledge and population. North acknowledges the importance of technological change when he states. and culture. such as individual breakthroughs or inventions. How else can one explain the fact that Microsoft rather than IBM be nefited the most from the development of IBM's personal computer? One might argue that Bill Gates was more entrepreneurial than his IBM customers. entrepreneurship. rather than a set of stable rules that opens the way for entrepreneurship. he ignores more direct causes of technological change. culture. they still remain ambiguous residual factors in the new institutional model. rather than any institutional framework per se. ideology. the new institutionalists.  But while North evokes the need to better understand these phenomena as sources of institutional change. as well as complementarities which can serve as organizing points. One need only think of the diversity of religious interpretation to understand the ambiguity of rules and guidance. would respond that they do allow for other factors as sources of change. In fact it is the very ambiguity of cultural norms that allows for innovation. if one analyzes firm behavior and outcomes more closely in the technology arena. This furthermore underscores the importance of Bill Gates' personal attributes. but it is doubtful that he was able to even imagine the outcomes of his exploratory process. culture seems to contain contradictions. are the . namely changes in technology."  While one can understand North's argument that the relationship between technical and institutional change is complex and interdependent. one can make the argument that luck and chance also play a large part in the rewards to particular developments. "Changes in technology . provided the fundamental driving force for increasing incomes... such as income redistribution to the needy and simultaneous espousal of equality of opportunity." He then also says. particularly technology. Furthermore. which may differ from one time and space to another. Our examination of the new institutionalism leads us to conclude that institutions are just proximate sources of change. our framework allows for institutional change to be an important and independent source of growth. and the informal constraints of ideology. Moreover. North and the new institutionalists tackle the problem of technological change in a limited and rather strange way. technological innovation economists also reject the notion that the technological entrepreneur or firm exhibits maximizing behavior. TO be sure. Finally. Since a host of phenomena. and norms.  To be sure.ideology and culture in determining and defining the efficiency of institutions. particularly North. norms.
just what does self-interest explain or predict? While the new institutionalists attempt to explain innovation as entrepreneurship. why not study these factors directly?  IV Conclusion WHILE MUCH OF SOCIAL SCIENCE is accelerating the quantification of human behavior through rational choice models. For example. institutions can dominate and shape social interactions. If martyrdom is self-maximizing in an altruistic sense. and regulations to different individuals and groups. If indeed anything can be defined as selfinterest.factors that change institutions (or show how institutions reflect stability at a given time). not just the individual level. The institutional framework itself. some cracks are beginning to appear on the engine of "econometricsization" of the social sciences. institutions are extremely powerful tools of system maintenance and legitimization. It is difficult to explain why group forces had nothing to do with the Iranian soldiers-martyrs during the 1980s Iran-Iraq war. and to the new institutionalists' own statements on the importance of entrepreneurship. Institutionalism. innovative. this new truism of the benefits of hierarchy brings to the forefront new and exciting issues as yet unresolved. allow for innovation. brings some of these problems to the forefront. This seems quite counterintuitive to traditional economic thinking with its emphasis on competition. In other words. then. can be used by the dominant classes to preserve the status quo through presenting differential opportunities. then anything can be defined as self-interest. and adaptive? Institutionalism also yields insights into class and group conflict. Yet. just how are we to know or measure the efficiency of a hierarchy that reduces transactions costs with a more decentralized organization which has higher costs but is more flexible. it explains a crucial basis for hierarchy in all social institutions--the benefits of stability and predictability of behavior. From a neo-Marxist point of view. the institution of the state is a tool of the dominant class(es). In short. such as the costs of uncertainty between a principal and an agent. Institutionalists point out that human behavior must be considered at the aggregate. both old and new. which is largely absent as a variable in traditional non-Marxist economics. The new institutionalism therefore clearly incorporates power. . rather than simply an "enabling" environment. they fail to explore the way in which both complementarities and contradictions in social systems. More importantly. Perhaps the most important point that new institutionalists bring out is that increasing the size of organizations can increase efficiency by reducing transaction costs. rules.
the new institutionalism fails in its attempts to improve rational choice models and loses their virtue of predictive power. 1990. Mansbridge. but goes beyond.  (*. Notes (1.S. and group norms.) We would like to thank the editor and Patricia Hira for help in improving this piece. Jane J. We are inevitably led to call for an entirely new model of human behavior that incorporates. candidate at George Mason University's School of Public Policy. Chicago: The University of Chicago Press. namely changes in culture. . International Trade Commission.. the importance of context. we can hardly maintain an individual actor-based.e. and social practice. the relative uniqueness of situations. for example. ed. i.. if we take seriously the new institutionalism's features of path dependence. rational choice-type of model. Anil Hira is an international trade analyst for the U. Ron Hira is a Ph. ideas. the new institutionalism. and then we can turn to how they relate to the institutional and preference changes that result from them.) See. Future models should explicitly define and delineate the true ultimate sources of institutional change. Beyond Self-Interest. In modifying the assumptions of rational choice models and introducing the seed of relativity.Despite these insights.D.
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