The New Institutionalism: Contradictory Notions of Change

American Journal of Economics and Sociology, The, April, 2000 by Anil Hira, Ron Hira

RON HIRA [*]

ABSTRACT. This article suggests that the new institutionalism contains ambiguous and contradictory notions of change. By setting up a model that explains institutional constraints on decision makers, the new institutionalism correctly points out the limits of a rational choice framework of economic decision making. However, by failing to explain the sources and avenues of modifications of those constraints, the new institutionalism is unable to provide a satisfactory explanation of change. Instead, we find a patchwork of exogenous factors, such as technology, culture, and ideology, which feed into institutional change in unclear ways. This paper reaches the conclusion that those factors for change should be examined directly, rather than through the proxy of institutions.

I

Introduction

THE NEW INSTITUTIONALISM is a relatively new theoretical perspective that 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, [1] 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 decision-making; and last but not least, explaining the dyna mics of decision-making.

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

INSTITUTIONALISM AS A BRANCH OF ECONOMICS dates back at least to the beginning of the twentieth century. "Old" institutionalists believe in path dependency (i.e. the importance of historical context), the autonomy of institutions, evolutionary economics, and a holistic approach to economics, that is, one that considers cultural and political factors of motivation, interaction, and organization. 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." [2]

By contrast, the new institutionalism draws greater legitimacy because of its roots in (traditional) neoclassical economic theory. Rather than seeking to replace neoclassical economics, the new institutionalists wish only to modify the rational choice, utility-based neoclassical model by relaxing some of its assumptions. The new institutionalism focuses on the central assumption of zero transactions costs in neoclassical economic models as the main gap to be filled. 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. [3]

Douglass North, a recent Nobel Prize winner (1993), is the most important proponent and theoretician of the new institutionalism. North points out that some of the standard and necessary assumptions of rational choice models are questionable. He notes that preferences are not always transitive (their intensities change over time and they are not in a stable order over time), and that "framing effects" (in which alternate means of presenting a problem result in different choices), preference reversals ("where the order of the choices on the basis of their reported values contradicts the implied ordering in direct choice situations") and ". . . problems in the formulation, manipulation, and processing of subjective probabilities in uncertain choices" also exist. [4]