Policy Implications of Recent Advances in Evolutionary and Institutional Economics

Claudius Grabner, Torsten Heinrich, Henning Schwardt, Claudius Grabner, Torsten Heinrich, Henning Schwardt

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317500445
• Edition: 1
• Topic: Économie
• Subtopic: Théorie économique

This collection is inspired by the coming retirement of Professor Wolfram Elsner. It presents cutting-edge economic research relevant to economic policies and policy-making, placing a strong focus on innovative perspectives.

In a changing world that has been shaken by economic, social, financial, and ecological crises, it becomes increasingly clear that new approaches to economics are needed for both theoretical and empirical research; for applied economics as well as policy advice. At this point, it seems necessary to develop new methods, to reconsider theoretical foundations and especially to take into account the theoretical alternatives that have been advocated within the field of economics for many years. This collection seeks to accomplish this by including institutionalist, evolutionary, complexity, and other innovative perspectives. It thereby creates a unique selection of methodological and empirical approaches ranging from game theory to economic dynamics to empirical and historical-theoretical analyses.

The interested reader will find careful reconsiderations of the historical development of institutional and evolutionary theories, enlightening theoretical contributions, interdisciplinary ideas, as well as insightful applications. The collection serves to highlight the common ground and the synergies between the various approaches and thereby to contribute to an emerging coherent framework of alternative theories in economics. This book is of interest to those who study political economy, economic theory and philosophy, as well as economic policy.

Part I

Foundations of institutional and evolutionary policy perspectives

1 Economic complexity and trade-offs in policy decisions

Henning Schwardt, Claudius Gräbner, Torsten Heinrich, Christian Cordes and Georg Schwesinger

Introduction

Policies are measures societies put in place in order to foster the achievement of certain objectives. In order to be able to influence outcomes in a way that is desirable, an understanding of the system to be shaped is required. You need to know what can be done, and you need to know how that may be achieved. Without a conception of the relation of factors in a system, policies cannot be systematically successful. Some have argued that such an understanding would be impossible and have therefore objected to any policy interventions into the economy (e.g. von Mises, Hayek). It was the important contribution of Wolfram Elsner (Elsner, 2005, 2015; Elsner et al. 2015) to show that using institutionalist theory and complexity economic methods, a sufficient understanding can in principle be achieved. Even more, such a perspective shows the necessity of an active role for public policy. Evolutionary institutional perspectives on policies are based on an understanding of economic and social systems that may constantly be changing. They are not aiming at the identification of economic laws derived in a static environment; rather, a general understanding of a system’s behavior and motion is sought. Based on this understanding, what can be achieved by implementing policies can be delineated more clearly. So can what degree of freedom there is in the system for attempts to redirect its dynamic onto a path that appears more desirable to the group. Trade-offs, not only between different aspects of economic objectives, but also between economic and non-economic outcomes, may become easier to grasp. What a society desires to achieve is a part of the process of determining policy measures (Martins, 2015). Illustrative examples are abundant in every sphere of economics and society. They include property rights legislation with the purpose of temporally cross-financing innovations, public investment in infrastructure, healthcare, research, and education, or disinvestment in such fields, the expansion of the economic sphere into culture or the conservation of nature, and many others. We will return to these examples below.

Policy formulations have to be understood as part of a continuous process, not only as exogenous measures limiting agents’ possibilities for action. The system itself is changing, and thereby, possibly, the way it functions can change as well. This may refer to a constant shift, or a dynamic with a certain degree of regularity and repetitiveness, say financial market stability over time, as a function of the risk build-up from individual decisions under different circumstances and expectations. Policies have to be reassessed against this changing background, then, and possibly adapted to fit the changes in the functioning of the system. A static set of rules cannot hope to succeed in achieving objectives in a changing system. A concise value-base is a necessary component of such assessments (see also Ramazzotti in this volume).

The institutional perspective adds connections of the economic sphere to other societal spheres. Against this background, policies have to take into account that they affect the different interests and values in a society. Such effects will involve trade-offs between different objectives in terms of time-horizon, distribution, and the impact on other societal interaction spheres, among others. These trade-offs will be the focus of this chapter. As such, we build on Elsner’s various contributions to this topic (Elsner, 2001, 2012).

The overall structure of this chapter is as follows. We will start with a brief rehash of the core pillars of an evolutionary institutional system for economic analyses, and the principal challenges for the formulation of policies in an environment for which this analytical system is adequate. The next section will discuss more specifically the role and position of public agents in such a system. A principal factor for policies to acknowledge and take into account is that it is unlikely for provisions not to have to accept trade-offs between different groups. These will be discussed in the fourth section of this chapter. The final section concludes.

An evolutionary institutional perspective on economic systems

The term evolutionary economics is employed to cover analytical frameworks that integrate notions of change in economic systems into their analytical structure. An evolutionary framework analyzes systems that do not simply move from equilibrium to equilibrium in the wake of “shocks”, but systems in which factors can produce dynamics of change endogenously. Dynamics may affect the system itself, and its shape and functioning, just as it may concern systems’ components, such as agents. An evolutionary framework allows economic issues to be analyzed without being tied to a static foundation, but rather acknowledging change as an integral aspect of modern economies.

An institutional perspective integrates social rules and norms – institutions – as a critical aspect of an analytical framework. These institutions provide the foundation for interdependent actions, by constraining the space of acceptable individual actions. Such constraints reduce the complexity that agents have to confront in a way that enables them to actually interact.

The original institutionalists built an analytical framework that integrates an evolutionary and institutional perspective. Here, institutions have emerged from individual interactions, and become habituated as “correlated patterns of thought” (Veblen, 2010; Waller, 1982; Bush, 1987; Elsner, 2012). Institutions do not determine behavior, of course, and individuals may always decide to act differently than is proscribed. Still, for coherence and continuity, as the foundation for stability, a sufficient (whatever that may mean in a specific situation) adherence to an institutional framework is required. The habituation that follows from stability shapes individual action as well as individual expectations about others’ actions. Instrumental motivations, of human curiosity and sociality, offer the potential of changes to be introduced to such patterns. Still, social control mechanisms help stabilize the institutional sphere in a group. Beyond the individual level, we therefore also find a dimension to them that is detached from any specific individual. Defining this combination of individual and group level and its effects, Commons (1931) describes the institutional sphere as embodying “collective action in control, liberation, and expansion of individual action.” Institutions shape the ability of individuals in groups to coordinate and cooperate in their activities (Elsner, 2012). A crucial aspect of institutions is that they both depend upon individual behavior, but at the same time affect individual decision-making. Wolfram Elsner therefore rightfully argues for the use of a meso-level, where institutional emergence takes place. This meso-level is connected to the micro-level both via upward and downward effects. This fact constitutes the need for a systemist perspective on the economy (Wilber and Harrison, 1978; Gräbner, 2016).

The different provisions for adequate behavior within a group are linked by the values motivating individual agents. That means that certain behavior patterns may stay in place, but the motivation behind them may change over time. Values underlie and connect behavior patterns (Bush, 1987). The general direction that a change of values is assumed to have is from group-focused instrumental, where problems at the group level are addressed suitably for the group, to individualistic, or ceremonial, behaviors, where invidious distinction is the main motivator for following certain provisions. Put differently, social problem-solving abilities of diverse groups are shaped by their institutional framework. Such institutional frameworks develop over time, typically in path-dependent dynamics. Differences in institutional frameworks are equivalent to differences in the problem-solving abilities of respective groups. In stable environments, over time, the relative problem-solving ability of groups declines as individualistic motives take over (Ayres, 1996; Elsner 2012).

The social problem-solving abilities in a group also shape the level of technology that is in reach for that group. Technology is a combination of skill and equipment; skill is exercised using equipment, matter becomes material if utilized in acts of skill (Ayres, 1996). The ability to employ potential effectively is related to the rules, norms, and values that guide individual behavior. The ability to extend our technological potential derives from our openness to learning and experimenting. In turn, this openness is again a function of the acceptable behavior in place, and that behavior’s direction in activities. Individuals thus are the drivers behind the process, while the system they move in shapes the space for the next steps they may take. As technological change builds on itself – new capacities emerge from the combination of existing abilities – given structures can have long-run ramifications. Changing the path, for instance to accelerate the speed of technological change, will tend to require actively involved measures to supersede the potential limitations of a given situation (Chang, 2008; Schwardt, 2013).

A constantly changing system

This institutional perspective includes the potential for ongoing changes, making it a natural part of evolutionary approaches to economics (Ayres, 1996; Veblen, 1898; Lee, 2011; Elsner, 2012). In parallel to shaping technological potential, motivations of individuals act as drivers of changes in the institutional framework. Inquisitiveness opens the doors to the possibilities for new technology. Learning and social dynamics influence the set of rules and norms in place. An increasing motivation of finding status within a given structure, on the other hand, exerts a push toward ceremonial motivations, especially in a long-running stable environment. Finally, technological potential and institutional provisions influence each other, in dynamics of circular and cumulative causation. Approaches focusing on more detailed aspects of the larger process have shown that there is no reason to suspect any particularly good results in such processes, even before we factor in a possible trend towards a ceremonialization of structures (David, 1985; Arthur, 1989; Foley, 1998). Even if selection processes are at work, there is no guarantee that the best (or even a good) solution is selected spontaneously. A path emerges in the process, not the selection of one solution for the system over others.

Changes thus manifest in different dimensions of social environments. They are the outcome of endogenous developments driven by individual agents responding to the structures they face, while maintaining their capacity for experimentation. Into which direction these energies are turned depends on the values that prevail at a given point in time. Opposed to the belief that some characteristics of the larger system (“economic laws”) remain unaltered during those changes, an evolutionary institutional perspective recognizes that the system itself may take on different characteristics over the course of its path. We can distinguish between changes that recur over time, such as in the level of economic activity and risk exposure of individuals in financial markets (Minsky, 2008), or it may refer to fundamental alterations in the system’s functioning (for instance, as described in Nell (1998) with reference to the impact of changes in production technology on stabilizing or destabilizing dynamics at the macroeconomic level).

In such a system, there is scope for strategic action by individual agents. They are not totally constrained by the characteristics of their interaction system. Their actions and reactions, anticipations and expectations, introduce a further impetus for the dynamics of change, though some constraints arising from Veblenian instincts, fixed modes of learning, habituation, or inclination to act fair if the environment permits do exist. They can shape their environment to some degree, and shape that of their surroundings as well. This scope for strategic action, for instance allowing the restructuring of others’ decision-situations to one’s own advantage, introduces possibilities for developments that are not particularly desirable from the perspective of the group as a whole. Power is an aspect of human relations and can be exercised in the framework we have adopted here.

Furthermore, the system itself, we have said, can change with the outcome of cumulative individual actions. There are influences and systemic characteristics that lie outside the scope of individual agents’ reach as well as grasp but that changes in response to the sum of individual actions, nevertheless. Individuals can be affected by developments that are neither a consequence of their action nor within the realm of their control. That means agents in the systems we consider here are vulnerable to developments outside their scope of influence. In common understanding, that means that they are not seen as responsible for the effects they may face. Vulnerability refers to a susceptibility to adverse developments in the economic system. It is translated into economic insecurity, describing the impact on the material basis of individuals’ living and circumstances. A distinction between the vulnerability of agents that is the result of systemic characteristics, and the insecurity of agents that is shaped by the measures possibly taken to address the effects of their vulnerability, helps designate areas of policy focus more clearly.

Challenges for policy formulation in constantly changing systems

If the principal characteristics of the system under observation are captured by these aspects, then policies cannot be static. There will be no rules that can hope to continue to produce the same outcome over time as the underlying relations between factors and causes and their effects in the system are developing.

As a consequence, policy frameworks have to be formulated to take into account this changing nature of the environment they are dealing with. Objectives will more reasonably be defined in terms of ranges for indicators, and these, in turn, have to be woven into a set of indicators to describe desirable markers to touch along the path of the system development. While a separation of different fields of interest is still necessary to handle any given issue, the openness of the system we are dealing with will require more frequent assessments of spillovers between different arenas (see also Ramazzotti in this volume).

A system that continues in existence has to be somewhat stable. Modern societies – and economies as parts of them – have developed over time. Experience and knowledge have been gained over time, therefore, on the various aspects of these systems, and have accompanied the changes undergone. Policy-making capacities have developed over time, and have required a continuous process of involvement, exchange, and learning in order to be able to accomplish the objectives set for policy-makers. Discarding these capabilities by reducing policy-making to the execution of narrow rules may result in a reduction of the long-run ability to steer the process of technological and economic change in an instrumental fashion.

As already stated in the introduction, the objectives of policies should be clear, and clearly stated. There will be different paths in pursuit of the eventual objectives. Which of these appear more promising overall will then have to be evaluated. Beyond specific objectives, this will involve the overall approach to the economic system. Risks from the economic sphere emerge from social structure and construct. They are man-made insofar as they are the outcome of the interactions of people that have an impact on the economic sphere. The great advance of industrialization was the reduction of risks and adverse effects emerging from nature. How to deal with man-made risks in social relations is a question that has to be answered in order to define the scope of policies and the abstract framework that those policies are set in.

One example of a question that is close linked to the issues concerning the understand...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Notes on contributors
• Preface
• Acknowledgements
• Introduction to the Festschrift for Wolfram Elsner
• PART I Foundations of institutional and evolutionary policy perspectives
• PART II Institutional and evolutionary approaches to policy analysis
• PART III Policy and crises: finance, growth, and industry
• Index