Institutions and the Role of the State (New Horizons in Institutional and Evolutionary Economics Series)

NEW HORIZONS IN INSTITUTIONAL AND EVOLUTIONARY ECONOMICS General Editor: Geoffrey M. Hodgson Research Professor, University of Hertfordshire Business School, UK

Economics today is at a crossroads. New ideas and approaches are challenging the largely static and equilibrium-oriented models that used to dominate mainstream economics. The study of economic institutions - long neglected in the economics textbooks - has returned to the forefront of theoretical and empirical investigation. This challenging and interdisciplinary series publishes leading works at the forefront of institutional and evolutionary theory and focuses on cutting­ edge analyses of modem socio-economic systems. The aim is to understand both the institutional structures of modern economies and the processes of economic evolution and development. Contributions will be from all forms of evolutionary and institutional economics, as well as from Post-Keynesian, Austrian and other schools. The overriding aim is to understand the processes of institutional transformation and economic change. Titles in the series include: Employment Relations and National Culture Continuity and Change in the Age of Globalization Ferrie Pot

Institutions and the Role of the State Edited by Leonardo Burlamaqui, Ana Celia Castro and Ha-Joon Chang

Marx, Veblen and Contemporary Institutional Political Economy Principles and Unstable Dynamics of Capitalism Phillip Anthony 0 'Hara

The New Evolutionary Microeconomics Complexity, Competence and Adaptive Behaviour Jason D. Potts

Institutions and the Role of the State ---_. _--

Edited by

Leonardo Burlamaqui Chair of Innovation and Competition and Director of Research, Faculty of Economics, University Candido Mendes, Brazil and Adjunct Professor of Political Economy, Faculty of Economics, State University of Rio de Janeiro, Brazil

Ana Celia Castro Chief,'

Graduate Program in Development, Agriculture and Society, Federal Rural University of Rio de Janeiro, Brazil

Ha-Joon Chang Assistant Director of Development Studies, Faculty of Economics and Politics, University of Cambridge, UK

NEW

HORIZONS

IN

INSTITUTIONAL

ECONOMICS

Edward Elgar Cheltenham, UK' Northampton, MA, USA

AND

EVOLUTIONARY

HD 87 155 2000 BUSI

© Burlamaqui, Castro, Chang, 2000 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited

Contents

Glensanda House Montpellier Parade Cheltenham Glos GLSO I UA

Figures and tables

UK

Vll

Introduction

IX

Contributors

Edward Elgar Publishing, Inc.

XVll

136 West Street Suite 202

PART ONE

Northampton Massachusetts 0 I 060 USA

1.

2.

THEORETICAL PERSPECTIVES ON THE ROLE OF THE STATE, IN STITUTIONS AND CONVENTIONS

An institutionalist perspective on the role of the state : towards an institutionalist political economy Ha-Joon Chang

3

Evolutionary economics and the economic role of the state Leonardo Burlamaqui

3.

A catalogue record for this book is available from the British Library

27

Disorderly coordination: the limited capacities of states and markets Fred Block

4. Library

of

Congress

Cataloguing in

Publication

Data

53

Con v ention s and institutions: rethinking problems

of state reform,

governance and policy

Institutions and the role of the state / edited by Leonardo Burlamaqui, Ana Celia

Michael StOlper

5.

Castro. Ha-Joon Chang.

73

From micro to macro: the concept of emergence and t he

role of institutions Geoffrey M. Hodgson

- (New Horizons in institutional and evolutionary economics) Includes bibliographical references and index.

103

I. Economic policy. 2. State, The. 3. Institutional economics. 4. Evolutionary economics. I. Burlamaqui, Leonardo. II. Castro, Ana Celia. III. Chan g, Ha-Joon.

PART TWO POLICY PERSPECTIVES

IV. Series.

6. HD87 .155 2000 338.9-dc21

National diversity and g lo b a l capitalism

Ron a ld 00-034731

7.

Dare Gestalt shift :

129 from 'miracle' to 'cronyism' in the Asian crisis

Robert Wade ISBN 1 84064 311 0 Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

8.

149

State refonn in the 1990s: logic and control Luiz Carlos Bresser Pe reira

v

mechanisms

175

VI

9.

Institutions and the role of the state

B lockage

versus

continuance in B razilian industrialization

Antonio Barros de Castro

1 0.

Lourdes Sola

II.

235

Public administration in Central and Eastern Europe: considerations from the ' state science' approach Wolfgang Drechsler

Index

22 1

C entral banking, democratic governance and political authority: the case of Brazil in a comparative perspective

Figures and tables 267 28 1

FIGURES Setting the Limits for the Sphere of Action of the State Institutions Resulting from State Reform Industry after the Real Plan, Growth Rate (%) of 1 2 Months Compared to the Previous 1 2 Months 1 0. 1 B onds and Debt Owed t o State Banks

8. 1 8.2 9. 1

1 88 194 230 255

TABLES 9. 1

Evolution of Industrial GNP, 1 96 8-98

vii

222

Introduction The last decade has witnessed the rediscovery, and rapid diffusion, of institu­ tionalist and evolutionary approaches in economics and other social sciences (see for instance, amongst many others, Nelson and Winter, 1 9 82, Dosi et at. (eds), 1 98 8 , Hodgson, 1 9 8 8 and 1 99 3 , North, 1 994, Maki, Gustafsson and Knuddsen (eds), 1 993 , Arthur, 1 996, Shionoya, 1 997). These two approaches , despite their remarkable potential for cross-fertilization have, until now, ' trav­ elled alone ' . Their common achievement has been the fact that their ap­ proaches and findings are increasingly posing serious intellectual challenges to the dominant neoclassical approach. It i s perhaps useful to observe that economic theory was, in its origins and for a long time thereafter, both evolutionary and institutionalist. Note, for instance, the discussion about the division of labour that opens Adam Smith 's Wealth of Nations, or his statements on the theory of value and distribution. The analysis is deeply concerned with change and deals quite explicitly with historical time. To summarize, it is highly ' institution-dependent ' and evolutionary. Excluding David Ricardo, whose approach lacked historical perspective and was aimed at drawing bold conclusions from simple hypotheses , inaugurating what Schumpeter would later call the ' Ricardian vice ' , the same can be said for all the other ' c lassical political economists ' including Robert Malthus l and both James Mill and John Stuart Mill. The same approach is also present in Karl Marx 's theory of industrialization and in Marshall 's ana lysis of ' industry and trade '. Obviously this is not to say that these were the exc lusive, or even the main, features of the canonical works in classical and ' modem' pol itical economy. What appears to have gone unnoticed in most studies of the development of economic analysis is the ambivalence and tens ion between the aforementioned concern with evolution and institutions - therefore, with history, path-depen­ dence and the interplay between economic and other forces - and the focus on 'Newtonian ' types of mechanisms and laws . That tension is sti ll at the core of economic debate today, and it is probably not much of an exaggeration to say that the future course of economics depends on how the discipline will deal with Institutions and Evolution without ruining its reputation as ' the most rig­ orous ' and ' the most prediction-oriented ' social science. ix

x

institutions and the role of the state

introduction

Let us also acknowledge the fact that, although the word ' institutionalist ' almost became a dirty word in Anglo-American academia after the fall o f American Institutional Economics led b y Thorstein Veblen, John Commons , and Wesley Mitchell in the early 20th century, by the early 1 9 80s it was not difficult to find articles in ' respectable ' journals that talked of a ' new ' institu­ tionalist approach (cf. Yonay, 1 9 8 8 ) . T h e new institutionalist approach, inspired by t h e works of Ronald Coase, Douglas North, and Oliver Williamson, shares some basic attributes of the dominant neoclassical approach - for example, the emphasis on self-seeking and rational behaviour, and the neglect of the role of power in shaping the evolution of institutions. In fact, it sought to explain: (a) how economic institu­ tions may arise due to transaction-cost-minimizing behaviour; and (b) how these institutions can affect subsequent economic behaviour - albeit, with more emphasis on the former. In the 1 9 80s and 1 990s, the approach was applied to a wide range of issues, including property rights (e.g., B arzel, [ 1 989] 1 997), the firm (e.g., Williamson, 1 9 85) , rural l and property and financial institutions (e. g . , B ardhan, 1 989) and international trading networks . T h e awarding o f the Nobel Prize to Coase ( 1 995) and North ( 1 994) in the early 1 990s symbolized the weight that this approach was gaining, even among mainstream economists. It must, however, be stressed that, important as it may have been, the New Insti­ tutional Economics was by no means the only institutionalist approach devel­ oped during the last two decades. Another is the 'behaviouralist ' school led by Herbert S imon, which empha­ sized the importance of the ' bounded' nature of our rationality and the conse­ quent limitations of the maximizing approach - that the new institutionalists share with neoclassical economists. The behav iouralists argue that the world we live in is too complex and uncertain for human beings to operate without some kind of( o ften deliberate ly created) constraints on their choice. According to Simon (Simon, 1 947 and the seminal work of 1 98 3 ) organizations and insti­ tutions would accomplish these roles (for more recent examples, see Heiner, 1 98 3 and S imon, 1 99 1 ) . Quite independently from the behavouralists, the ' Austrian School ' , led by Friedrich H ayek, is also very much an institutionalist approach, emphas izing the ro le of what they call ' tradition' in detennining human behaviour. Indeed, they s hare with the behavioural ists a view of the world as a complex and uncer­ tain place and scepticism about both the perfect human rationality and the maxi mizing approach. The Austrians, however, parted company with the behaviouralist school when they claimed that the complex and uncertain nature of our world dooms attempts to control it by deliberately constructing new in-

stitutions - which they call ' rational constructivism ' . This is exactly why we need institutions, according to the behaviouralists (classic statements of the Austrian view o f institutions can be found in Hayek, 1 949, 1 97 8 , 1 994 ; Kirzner, 1 99 2 ; and O ' Driscoll and Rizzo, [ 1 9 8 5 ] 1 996 arc some recent ex­ amples). Finally, on the other side of the analytical spectrum, the works of Karl Marx and Karl Polanyi have emphasized the role of relationships of power in shaping the evolution of institutions. Polany i's classic work shows how the birth and subsequent evolution of the actual foundational institutions of cap italism property rights (especially of land and labour) and the market - have been shaped by relationships of power (Polanyi, [ 1 944] 1 980). This approach is shared today by authors such as Fred B lock, Mark Granovetter, Peter Evans and many others (cf. Block and Sommers, 1 9 8 5 , Granovetter and S wedberg (eds), 1 992, Smelster and Swedberg (eds), 1 994, and Hollingsworth and B oyer (eds), 1 997). Marx 's legacy gave birth to another new trend in economics (albeit in a fairly roundabout way) through his great admirer, and reluctant disciple, Jo­ seph Schumpeter: the evolutionary approach. While Marx himself was influ­ enced by the works of Charles Darwin, it was Schumpeter who first incorpo­ rated evolutionary biology into economics in an explicit and systemati c way (Schumpeter, 1 9 1 1 , 1 93 9 , and 1 942) . Schumpeter argued that changes in tech­ nology and institutions should be understood as an evolutionary process, in which changes are made incrementally and with path dependency. Of course, Schumpeter did not argue that the mechanisms of biological evolution could be found in the economic sphere. He went to great pains to show that 'mutation ' in the economic world (or what he calls innovation) is both conscious and pur­ poseful - whereas in the biological world it is random.2 One of the fathers of the 'old' institutionalist school, namely Thorstein Veblen, was also very much committed to an evo lutionary perspective, as the recent work of Geoff Hodgson and others have clearly shown (cf. H odgson, 1 98 8 , 1 993 , 2000; LouC;ii, 2000; O ' H ara, 2000). In summary, although both the institutionalist and evolutionary approaches are increasingly posing serious intellectual challenges to the dominant neoclas­ sical approach, as can be seen, for instance, in the flood of books and articles that fill the catalogues of Elgar, Routledge, Kluwer and several ' U niversity Press ' publishing houses, there is an clement strikingly common to most of these works. Namely, despite their affinity, there has been relatively l ittle interaction between these two potentially very complementary approaches . It is our claim that both the institutionalist and the evolutionary perspectives in economics share the same core assumptions, way of theorizing, and key re-

xi

xiii

Institutions and the role o/th e state

Introduction

suits . It is puzzling, therefore, that they have travelled along the same roads and fought the same enemies without ever borrowing from each other or, worse, without forging a ' strategic theoretical alliance ' . The present volume, resulting from a very successful conference held i n Rio de Janeiro in November 1997,3 i s an attempt to begin to fill this theoretically challenging and pol icy relevant gap . It puts together eleven essays written by leading scholars in the field and has two chief obj ects : to contribute to the cross-fertilization o f the aforementioned approaches and to apply them to one o f the most controversial issues of our day, namely, the role of the state. The choice o f the role of the state as the common topic for this intellectual dialogue between the traditions was not a random choice. It was intended to fill a common and serious lacuna that can be easily noticed in these traditions. After all, despite the obvious relevance of their approaches for statecraft and policy issues, scholars writing in these traditions have been unusually silent on these topics (some obvious exceptions are the contributors to this volume such as B lock and Chang). The contributors to this volume have in common the understanding that the ' invisible hand' of the market is sustained by a complex and constantly evolv­ ing set of institutions, in whose desi gn and enforcement both the state and other institutions play a critical role. Using the newly-developed theoretical frame­ works of institutional and evolutionary economics, the essays i n the volume emphasize (a) that the market and the state complement each other, (b) that the former would not be even able to exist (let alone ' work well ) without the ' vis­ ible hands ' of state bureaucracies and public policies and (c) that such interac­ tions occur within a complex matrix of institutions. More specifical ly, the book includes essays that provide an explicit theo­ retical discussion of the role of the state (Burlamaqui, Chang, B lock), as well as essays which provide the theoretical foundations for this discussion (Storper on the social science of conventions and Hodgson on emergent properties) . It a lso contains essays that focus o n specific empirical cases (Wade and Dore o n East­ Asian developmental states, Bresser Pereira, Castro and Sola on Brazil and Drechsler on Estonia) and discuss policy issues. Therefore, the volume offers a good methodological guide for researchers working in the two fast-evolving institutional and evolutionary traditions, for professionals unsatisfied with reductionist theoretical approaches and for people concerned with concrete policy discussions and proposals based on keen theoretical analyses as well as some careful studies of historical and con­ temporary cases. The book is divided into two parts. The first part includes the more theoreti­ cally-oriented chapters on the role of the state, institutions and conventions .

The second part includes more empirically (and pol icy) oriented chapters, ap­ plying the institutionalist and evolutionary theoretical insights to the analysis of some important real-l i fe cases.

xii

'

NOTE S I.

2.

3.

Whose Essay on Population, let us not forget, influenced Darwin's thought, which, in its turn, signi ficantly influenced both Marx's vision of capital accumulation and evolutionary eco­ nomics (Veblen and S chumpeter being clear examples). Schumpeter 's evolutionary approach was l ater expanded by Nelson & Winter ( 1 9 8 2), who applied ideas from genetics, which had not really been developed in Schumpeter's own time, to the understanding of technological change. 'Institutions and Economic Development: A S tate Reform Perspective ', organized by Leo­ nardo B urlamaqui, Ana Cel ia Castro and John Wilkinson - CPDAlUFRRJ (Graduate Course in Development, Agriculture and Society, Federal Rural University of Rio de Janeiro) and N U S EGfUERJ (Superior Nucleus of Governmental Studies, State University of Rio de Janeiro) .

BIBLIOGRAPHY

Arthur, B. (1996), The Economy as an Evolving Complex System, Santa Fe: Santa Fe Institute o f Studies in Sciences of Complexity, vol. 27. Bardhan, P.K. (1989), Land, Labour and Rural Poverty: Essay in Development Economics, New York: Columbia University Press. Barzel [1989] (1997), Economic Analysis of Property Rights (Political Economy ofInstitutions and Decisions), Cambridge: Cambridge University Press. B lock, F. and M . S ommers (1985), ' B eyond the Economist Fallacy : The Holis­ tic Social Science of Karl Polanyi ' , in T. Skocpol (ed. ), Vision and Method in Historical Sociology, Cambridge : Cambridge University Pres s . Coase, R . H . (1995), Essays o n Economics and Economists, Chicago : Univer­ sity of Chicago Press. Clemence, R. (ed) (1951), Essays ofJ.A. Schumpeter, New York : Addison Wesley. Dosi, Giovanni, Freeman, Christopher, Nelson, Richard, S ilverberg, Gerald and Luc L . G . Soete, (eds) (1988), Technical Change and Economic Theory, London: Pinter. Evans, P. (1995), Embedded Autonomy: States and Industrial Transformation, Princeton, NJ: Princeton University Press. Granovetter, M . (1985), ' Economic Action and Social Structure : The Problem of Embeddedness' ,American Journal of Sociology, 91 (3 ), pp. 481-510.

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Granovetter, Mark and Swedberg, Richard (eds) ( 1 992), The Sociology of Eco­ nomic Life, Boulder: Westview Press. Hayek, F.A. ( 1 949), Individualism and Economic Order, London: Routledge & Kegan Paul . ( 1 978), The Constitution ofLiberty, Chicago: University of Chicago Press. . ( 1 9 94), The Road to Serfdom, Chicago: University of Chicago Press. Hodgson, G.M. ( 1 9 8 8 ), Economics and Institutions, Cambridge: Polity Press. Hodgson, G . M . ( 1 993), Economics and Evolution, Cambridge: Polity Press. Hodgson, G . M . ( 1 999b), Evolution and Institutions: On Evolutionary Economics and the Evolution of Economics, Cheltenham: Edward Elgar. Hodgson, G . M .. (2000)How Economics ForgotHistory: The Problem ofHis­ torical Specificity in Social Science (forthcoming). Hollingsworth, 1. and Boyer, R. (eds) ( 1 997), Contemporary Capitalism - The Embeddedness ofInstitutions, Cambridge: Cambridge University Press. Kirzner, 1. ( 1 992), The Meaning ofthe Market Process, London: Routledge. Lou