Experimentalism and Institutional Choice

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.