A general theory of institutional change (Tang 2011a)

If there is only one common concern within the three major subfields of social sciences (i.e., economics, political science, and sociology), it has to be institutional change and the effect of institutions (i.e., formal rules and norms as informal rules) upon human welfare. If institutions are “the foundation of social life” (Campbell

2004,1), then institutional change is a fundamental force of social change. As such, to truly understand institutions, we must have an adequate understanding about the process of institutional change; a general theory of institutional change must lie at the heart of social sciences.

A good general theory of institutional change, in addition to being logically consistent, must satisfy three other conditions. First, the source of change in the theory must be endogenous: “If one is going to explain change, the source of the change cannot be exogenous” (Boland 1979, 968). Second, the theory must be able to explain a wide range of specific cases of institutional change relatively self-sufficiently, with minimal requirement to introduce ad hoc or exogenous factors other than perhaps historical accidents. Third, assuming institutions do matter for human welfare, a good general theory of institutional change must be able to explain four basic facts associated with institutional change, with each of them containing two apparently conflicting (thus dialectic) aspects. These four basic facts are stability' versus change, slow change versus rapid transformation, commonality' versus diversity, and short-term uncertain impact on welfare versus long-term human progress in the material sense.

Measured against these yardsticks, there exists no sound general theory of institutional change. In Tang (2011a), I contend that a major cause behind our inability to come up with a sound general theory' of institutional change has been that social scientists have been unable to synthesize two competing approaches toward institutional change, that is, the harmony approach and the conflict approach, into a coherent approach.

For instance, economists, after (re-)discovering the role of institutions, have generated a large body' of literature on the evolution of institutions and the effect of institutions (for a concise review of the literature, see Tang 2011). Economists, however, have mostly advanced naive theories for institutional change, mostly' critically, because they' have been donning the straitjacket of NCE. Unfortunately, NCE is a harmony' approach that simply cannot handle real struggle for power and real, sometimes violent, conflict.6 As a result, most NCE-inspired theories of institutional change have chosen to ignore power and contend that institutions are solutions achieved by agents’ cooperative or collaborative bargaining toward Pareto-superior or even optimal outcomes. Yet, such theories of institutional change face an embarrassing question: If institutions are Pareto-superior or optimal solutions, then “why hasn’t the whole world been developed?” (Easterlin 1981).

Meanwhile, the conflict approach, prominently represented by' Marxism and other less radical conflict approaches in sociology, political science, the old institutionalism economics (OIE) in economics (i.e.,Thorstein Veblen), and social critique of Deleuze and Foucault, sees institutional change as essentially' a process through which dominating agents impose their political will upon other agents. As Weber (1978,51) put it, “an order is always ‘imposed’ to the extent that it does not originate from a voluntary' personal agreement of all the individuals concerned.”

The conflict approach, however, would be hard-pressed to explain the metafact of human progress. If most institutions simply represent the interest of specific individuals and groups and may not actually improve the welfare of the whole society (i.e., any single act of institutional change does not necessarily lead to Pareto-superior or optimal outcomes), then how can human society have managed to progress a great deal—a fact that necessarily implies that human societies have at least invented many welfare-improving institutions in some parts of the world? If institutions are for a special agent or class, shouldn’t human society be doomed to repeated conflicts over rules, without necessarily hitting on welfare-improving rules?

Deploying SEP’s central mechanism of artificial VSI/SVI, I advance a general theory of institutional change. Institutions as rules and norms are embodiments of social knowledge or codified ideas. Because there is diversity’ of knowledge among agents (i.e., there will always be more than one idea about how a future institutional arrangement should look), the process of institutional changes is essentially about how to turn a very limited few of those numerous ideas into institutions. As such, we can take ideas for particular institutions as genes and institutions as phenotypes, and then apply SEP—with the mechanism ofVSI/SVI at its core—to institutional change and advance a general theory of institutional change.

The process of institutional change consists of five distinct phases: 1) generation of ideas for specific institutions, 2) political mobilization, 3) struggling for the power to design and dictate specific institutions (i.e., to set specific rules), 4) setting the rules, and 5) legitimatizing and stabilizing the rules. These five phases correspond to the three phases of mutation (variation), selection (reduction in variation), and inheritance (stabilization) in evolution: Generation of ideas corresponds to mutation; political mobilization and struggling for power to selection; and setting the rules and legitimatizing and stabilizing to inheritance. Needless to say, power is a central selection and inheritance force in institutional change.

As elaborated in Tang (2011a), the new general theory of institutional change can readily explain the four basic facts associated with institutional change, with each of them containing two apparently conflicting (thus dialectic) aspects. More profoundly, the new theory of institutional change can readily explain both human progress in the long run and stagnation (if not disaster) in the short run.

Ever since Kant (1784) outlined the idea for a universal history of humankind in the spirit of enlightenment, generations of giants (e.g., Hegel, Marx) labored on the question whether there is progress as some kind of directionality in human history as a whole (Fukuyama 1992,55-70). Kant believed that the selfish antagonism (unsociable sociality) explains human progress. In 1992, Fukuyama shocked the world with “The End of History and the Last Man,” in which he asserted that Kant and Hegel were essentially right in asserting that there is a directionality (or progress) in human history toward market economy and liberal democracy. Fukuyama explained this progress with two “spirits”: the scientific spirit (i.e., reason) and the demand for recognition. The first spirit explains the triumph of market economy: Science needs a market economy to prosper, and only a market economy creates wealth and satisfies humanity’s endless material needs. The second spirit explains liberal democracy because only liberal democracy can grant the ideal of equality among men.

While bold and justly famous, Fukuyama’s explanation is incomplete, if not simplistic. In contrast, the new general theory of institutional change can adequately explain human material progress, as measured in GDP per capita and lifespan. Briefly, just as evolutionism explains organisms’ adaptation via the mechanism ofVSI, SEP explains social progress via the mechanism of artificial VSI/SVI.7 The most critical difference between biological evolution and social evolution is that human intelligence plays an enormously important role in the latter. Unlike in biological evolution where nature alone determines the fitness of a phenotype, it is human intelligence and nature together that ultimately decide the fitness of an institution as a phenotype in human society.

Just as the fitness of a phenotype in biological evolution can only be tested in the ecosystem, the fitness of a phenotype in social evolution can only be tested in the social system. The fitness of an institution in social evolution is thus measured by its welfare-improving effect, as judged by human intelligence within the constraints provided by the physical environment. It is in this mechanism of “artificial selection” that the ultimate foundation for human progress lies. In short, even though a single process of institutional change does not guarantee that a good idea (or a good institutional arrangement) will win, the mechanism of artificial selection in institutional change (and in social evolution in general) guarantees human progress in the very long run.Through the competition of ideas, selection based on subjects’ calculations, and competition among groups, some good institutional arrangements eventually win in the long run, and human progress is secured. While we may not arrive at welfare-improving institutions every time due to our limited knowledge, our desire for happiness guarantees that we will make progress in the long run, although the process has often been long, difficult, and sometimes bloody.The general theory thus offers a robust explanation for human progress.

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