Experimentalism and Institutional Choice

by Jack Knight on November 13, 2007

In his new book Dani Rodrik argues that the primary question facing both scholars and policy makers in the area of economic development should be “how should the institutions of economic globalization be designed to provide maximal support for national development goals?” In the course of answering this question in a challenging and highly engaging way, he continually pushes the idea that “when it comes to industrial policy, specifying the process is more important than specifying the outcome.” Quite appropriately he acknowledges that despite all of our efforts there is still a great deal that we do not know about the relationship between political and economic institutions on the one hand and economic growth on the other. And thus Rodrik recommends that we employ processes of experimentation as a way of developing a better understanding of which institutions might best facilitate growth in different contexts. In this regard he suggests that democracy might serve as a metainstitution for structuring this type of experimentation.

As a pragmatist I heartily endorse the focus on experimentation. And I share the belief that democracy can play a central role in facilitating institutional experimentation. Nonetheless, I think that the relationships between institutional choice and experimentalism and between experimentalism and democracy are more complicated than Rodrik’s optimistic account might suggest. At the very least I want to suggest that the institutional implications of these processes warrant more extended consideration than Rodrik is able to give them in this very interesting work.

In some joint work with Jim Johnson I have pursued an analysis of the relationships among institutional choice, experimentalism and democracy. On our account, politics in most modern societies largely consists in contests over the contours and distributive implications of shared institutional arrangements. In any country there exists a plurality or range of feasible institutional forms. In addition to markets and democratic decision-making procedures this includes, but is not limited to, bureaucracy, adjudication through courts, private associations, economic hierarchies and social norms. Once we recognize this plurality, the task of choosing which kind of institution should best coordinate our social interactions in any particular setting appears quite daunting. This in turn raises the difficult task of discerning how, in such circumstances, any heterogenous constituency of actors, with their diverse and often conflicting interests, values and commitments, might determine which array of institutional forms to use to coordinate ongoing interactions across various social domains.

This task turns out to be a very complex one. As standard textbook accounts make clear in the case of markets, any available institutional form will operate effectively and thus generate normatively attractive outcomes only under particular (and in principle specifiable) conditions. In his book Rodrik puts great emphasis on the claim that the effectiveness of any set of economic institutions is context specific. It is important to understand what all is entailed by this claim. Most obviously, it implies that institutional effectiveness is a function of the social, economic and cultural factors that characterize a particular country. However, it also implies that institutional effectiveness depends on the presence of certain preconditions, such as, in the case of markets, the structural and participatory conditions necessary for effective market competition. So, in any particular context the task of institutional choice involves both the selection of an institutional type and a commitment to foster and maintain the conditions necessary for effective institutional performance.

Here it is important to emphasize that this does not merely characterize the choice of economic institutions. The effectiveness of any type of institution will be a function in large part of the conditions in which it operates. And to further complicate the task there has been much less systematic research about the effective preconditions of institutions like democratic decision-making and courts than about markets. Nonetheless, the task of institutionalizing democratic and judicial arrangements require that we make a commitment to establishing and maintaining our best understanding of the conditions that make democratic governance and courts effective in achieving the goals we impute to them.

This is where experimentalism enters the picture. We engage in institutional experimentation in order to generate knowledge about the effectiveness of institutions in various social contexts. Theoretical analysis can make important contributions to our understanding of issues of institutional performance but, as Rodrik forcefully argues, it alone cannot provide definitive answers to questions of actual effect. Such answers can only come from the cumulative experience of using the various institutions at our disposal. In the end we trust or value experimental outcomes insofar as they emerge under proper conditions and we expend much effort in monitoring those conditions.

The importance of “proper conditions” highlights the fact that experimentalism is itself an institutional choice. The type of experimentalism that Rodrik advocates will only be effective if the conditions are in place to let the process work as we intend it. To foster and maintain these experimental conditions we require some kind of institutional framework of monitoring and assessment. Here the logic of institutional experimentation starts to resemble an infinite regress of institutions and conditions and metainstitutions and metaconditions, etc.

But this is where the central importance of democratic governance for the type of experimentalism that Rodrik envisions becomes evident. We need institutions of democratic decision-making to be able to stop the dynamic of moving back from coordinating institutions and effective coordinating conditions to the monitoring institutions and effective monitoring conditions that allow these institutions and conditions to work, to the meta-monitoring institutions and meta-conditions, and so on …..

Any pragmatic account (such as Rodrik’s account) that wants to avoid this infinite regress has to be grounded in some institutional arrangement that can satisfy the burden of self-regulation. Institutions of democratic decision-making are the only arrangement that offer such a possibility through the logic of their own operation. They are the one type of institution that can serve as the framework for institutional experimentation (including the tasks of monitoring conditions and assessing outcomes) and, crucially, monitor whether the conditions of their own effective operation actually obtain. This follows from an important characteristic shared by democracy and the logic of experimentalism: reflexivity. Reflexivity is a crucial feature of experimental procedures. And, as I have argued together with Jim, it is a basic characteristic of effective democratic governance.

With limited space here I cannot set out the full details of our argument, but its thrust is as follows. The reflexivity of democratic arrangements derives from the fact that political argument – again, under the appropriate conditions of freedom and equality – requires relevant parties to assert, defend and revise their own views and to entertain, challenge or accept those of others. It derives, in other words, from ongoing disagreement and conflict.

In this respect democratic institutions clearly differ from market interactions where, in the case of disagreement parties simply “exit” to seek more favorable terms of exchange elsewhere while in cases of agreement they simply trade without concern for the efficiency or distributive features of aggregate outcomes. Market interaction is decentralized in the sense that those who are party to any particular interaction are charged neither with reviewing or monitoring in an ongoing way the conditions under which the institution of exchange itself operates nor with assessing the consequences of how broader institutional arrangements operate.

It is just here that democratic institutions enable a level of reflexivity unavailable in other institutional forms. For political argument not only allows members of a democratic polity to collectively revisit past substantive decisions, it also allows them to collectively reconsider and revise the terms of their ongoing interactions. Moreover, because democratic arrangements structure political argument so as to allow the emergence of new ideas, perspectives and interests and, thereby, new constituencies and oppositions, this reflexivity has an endogenous, dynamic dimension. In practical terms it is less useful to characterize political debate as inducing agreement than to see it as structuring disagreement. The grounds for the claim that democracy is reflexive, then, emerge when we see how, when it is successful, it structures disagreement and, thereby, potentially fosters still further disagreement.

This, of course, does not guarantee that democratic governance will function to foster and maintain experimentalism as well as to stabilize the dynamic of effective institutional choice. The claim that I am making is, rather, a possibility argument. What I mean to emphasize here is that democracy, under the appropriate conditions, offers a better opportunity of achieving these necessary goals than do other available alternatives.

The fundamental importance of this is brought home when we acknowledge that institutional choice will commonly involve disagreement and conflict. Some sources of conflict may involve differences over interests and values, differences in the distributional consequences of institutional choice. Other sources may merely involve differences of opinion about the best way to proceed in the face of uncertainty about the present and the future. When such disagreement inevitably arises, the success of any institutional framework will depend on our ability to manage conflict and facilitate coordination wherever possible. Thought about in this way, a commitment to experimentalism is, like a commitment to democracy, really another instance of a more general commitment to ways of coordinating our various forms of disagreement.

One Economics, Many Recipes creatively and persuasively sets out a case for the benefits of this kind of institutional experimentalism for economic development and growth. As Rodrik continues to pursue these questions, I would offer two friendly suggestions. First, we need to give greater attention to what he categorizes as “the institutions of conflict management.” Near the top of this agenda should be questions about the incentive effects of various institutional arrangements. For example, what incentives are necessary to get people to participate in such an experimental process? And what incentives are necessary to encourage them to accept both the costs and the resulting outcomes of the process? Second, Rodrik’s first best proposal envisions experimentalism at the global level. If this is desirable, then we need to think hard about how we will foster and maintain conditions of effective experimentation in the international context. This strikes me as a much harder question than anyone presently writing on these issues seems to think.

{ 7 comments }

1

Tracy W 11.14.07 at 10:40 am

We engage in institutional experimentation in order to generate knowledge about the effectiveness of institutions in various social contexts

Agreed.

Institutions of democratic decision-making are the only arrangement that offer such a possibility through the logic of their own operation.

What is your support for this statement?

The English language does not involve any institutions of democratic decision-making and yet appears quite capable of experimentation.

Market interaction is decentralized in the sense that those who are party to any particular interaction are charged neither with reviewing or monitoring in an ongoing way the conditions under which the institution of exchange itself operates nor with assessing the consequences of how broader institutional arrangements operate.

Huh? What’s stopping any party in any particular interaction with reviewing and monitoring it? And proposing changes, or setting up a new one?

We know that people do not need to be specifically charged with the job of reviewing or monitoring things in order to do it. For example, back in the 19th century, it was expected that women would have nothing to do with political life. But then some women decided, off their own bats, that they should have the vote, and set about forcing it to happen. Just because no one is specifically charged with a job doens’t mean it doesn’t get done.

It is also noticeable that privately-owned organisations spend a fair bit of time lobbying the government to change broad institutional arrangements that affect their industry. This implies that they spend a bit of time monitoring, reviewing and assessing the consequences of how broader institutional arrangements operate. Indeed, it is quite possible to make a decent living as a consultant doing this for large companies.

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JJ 11.15.07 at 2:29 am

We know that people do not need to be specifically charged with the job of reviewing or monitoring things in order to do it. For example, back in the 19th century, it was expected that women would have nothing to do with political life. But then some women decided, off their own bats, that they should have the vote, and set about forcing it to happen. Just because no one is specifically charged with a job doens’t mean it doesn’t get done.

This example is strictly speaking irrelevant to your objection. It is not in any way an instance of those involved in market interactions engaging in the sort of behavior in quesiton. If I don’t like the terms of trade I can walk away. I can make another offer. But precisely what incentive do I have to question the scaffolding of property rights, contract enforcement etc. that structure the market? None. And can I buy such alterations on the market? No, I need, like your lobby-buying forms to engage in political processes.

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Tracy W 11.15.07 at 9:20 am

But precisely what incentive do I have to question the scaffolding of property rights, contract enforcement etc. that structure the market? None.

I disagree. If you think that the scaffolding of property rights, contract enforcement, etc, is not to your liking you have every incentive to question them. And people do. For example, enforcement mechanisms for contracts are diverse. There is the formal legal system, but there are other options. For example, you can write into the contract that in case of dispute it will first go to an independent mediator rather than the formal legal structure. You can employ escrow companies as a means of contract enforcement. I am not a lawyer, there are probably other options.

Property rights have been questioned within market structures too. Have you heard of the “copyleft” movement? http://www.gnu.org/copyleft/.

People must have an incentive to question the scaffolding of property rights, contract enforcement, etc, as they do indeed do so, and find alternative means of achieving their goals. What form that incentive may take probably varies from person to person. But it clearly exists.

And can I buy such alterations on the market?

Depends on what alteration you are making. Clearly some services, such as mediators, escrow companies, etc, can be brought. Others you have to do yourself, eg copyleft (possibly with the advice of a lawyer or another expert).

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JJ 11.16.07 at 3:03 am

I partly agree and wholly disagree. First the disagreement. There is a regress here. A contractually specified mediator or an escrow company presupose contract enforcement and legal incorporation (perhaps a system of social norms might work instead or legal incorporation). Those are political/legal institutions. They are not supplied by markets at least until they are constituted in non-market settings. And they may not be supplied on markets even then.

Second, the partial agreement. You are right that I might have an incentive to question (in the sense of grouse about)the institutional scaffolding that sustains market competition. But since nearly every element of that scaffolding is a public good, my incentive to try to alter it encounters a large-scale collective action problem. It is unlikely I can change any element of an institutional arrangement unilaterally. (I assume that these are equilibrium outcomes.) On a market I am simply going to seek out an alternative trading partner.

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Tracy W 11.16.07 at 8:52 am

Those are political/legal institutions. They are not supplied by markets at least until they are constituted in non-market settings. And they may not be supplied on markets even then.

This appears to be a definitional problem. You define contractual enforcement as a non-market thing, and lo-and-behold markets cannot supply them.

You are right that I might have an incentive to question (in the sense of grouse about)

Given that I gave examples of people changing means of contract enforcement and property rights, clearly some people do not merely question but have changed what is happening.

But since nearly every element of that scaffolding is a public good

Really?

The economic definition of a public good is something that is:
– non-rivalorous (so the amount I consume does not reduce the amount available for you to consume)
– non-excludable (so I can’t stop you from participating in its benefits).

I don’t think that every element of the scaffolding is a public good. For example, the courts system is not a public good. It is very easy to exclude people from it. For example, married women were excluded from the civil courts system in 18th century England, and the 19th until various legal reforms.

Democracy is not a public good, it is very easy to exclude people from voting. Women, blacks, Jews, have all been excluded from voting.

my incentive to try to alter it encounters a large-scale collective action problem

Thus explaining the massive failure of the suffragists to win women the right to vote. Hmm, are we living on the same planet?

It is unlikely I can change any element of an institutional arrangement unilaterally.

Agreed. In any action involving other people, it is wise to get at least some of those people’s agreements. Even the toughest guy has to sleep sometimes, and thus even the nastiest dictators need to keep their bodyguards on their side. This is true regardless of whether we are talking about markets, governments, the Mafia, hunter-gatherer tribes or your local PTA group.

On a market I am simply going to seek out an alternative trading partner.

Did you read my previous comment? At all? I gave explicit examples of peoples in markets changing institutional arrangements, like property rights.

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Tracy W 11.16.07 at 8:55 am

Opps, when I said This is true regardless of whether we are talking about markets, governments, the Mafia, hunter-gatherer tribes or your local PTA group. the “This” I meant to refer to was the difficulty of changing institutional arrangements unilaterally. I don’t think that every market, government, hunter-gatherer tribe and local PTA group is ruled by a nasty dictator.

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JJ 11.16.07 at 7:52 pm

Tracy,

Yes, I read your earlier post. I just think you are wrong. I know that may be surprising to you.

Yes, there are definitional matters at issue. You think contract enforcement is regularly supplied on markets. In vrtually everything I have read except your post contract enforcement is defined as a ‘non-market thing’, part of the insitutional scaffolding that markets themselves cannot supply well or at all. Sure, we can observe, say, Mafia style private enforcement rackets. But those sorts of private exchange hardly meet any of the criteria for market interactions (I’d say the voluntary nature of Mafia protection is in serious quesiton). Economic and political exchange does not necessarily amount to market interaction. I’d say the burden is yours here.

Yes, public goods ae defined in the way you condescendingly suggest. I’ve read the literature too. But public goods tend to be group specific. Perhaps you can go back a re-read Mancur Olson? So all your smart-ass remaks about women and jews and so on really are not on point.

Yes collective action problems can be overcome; hence your planet and mine are closer than you think. That does not mean they are not problems that require some sort of resolution. Suffragists were not in a market for votes. And are you suggesting that they had no collective action problem to surmount? Did they just mystically gather in their struggle?

That said, historically franchise extensions are driven less by demand-side protests but supply- side calculations made, because those who already hold voting rights think it somehow in their interest to include others. Here you can read Ruth Collier on the European and Latin American cases and Keyssar on the American case.

As for changing property rights your ‘copyleft’ example has been almost unnoticable in terms of displacing existing insititutional arrangements. I would suggest that the infinitesimally small number of folks who subscribe to it is in fact evidence of just how weak the incentive to set out on instituional reform actually is. Hence we are back to my point about coordination. Can you come up with an example that has had some real effect? Or are we going to remain far to the right of the decimal point?

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