II. LITERATURE REVIEW
2.5. Institutional heterogeneity, ambiguity and paths to dynamism of institutionalism
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foundations is to certain extent even un-fit to theorize of institutional change (Streeck &
Thelen, 2005). Perfect closed institutional systems would create coherent perfectly coupled social behavior (Phillips et al., 2004, p. 644) but in reality, the institutional systems are open socially constructed systems with inherently imperfect institutions (Becker, 2007; Streeck & Thelen, 2005). The constant dynamism observed in empirical data is even crucial for sustained vitality of social systems – rigid societies regress (Thelen, 2014). Especially institutions as equilibrium approach assumes all societal actors are embedded in the same social game, which then makes institutional change impossible as change would require coordinated “joint belief shift” among all actors (Culpepper, 2005; Greif & Laitin, 2004), or exogenous change in bargaining strength of specific interest groups (North, 1990, p. 86). But in empirical reality, market economies as pluralist societies are constituted by institutional diversity (Whitley, 1999), institutions are imperfect and resources of actors change along the game (Greif & Laitin, 2004), which means the institutions-as-equilibria approach should approach market economies as a plurality of games, where actors have ability to move between games and institutional change is thus not dependent on whether all actors in coordinated fashion re-shape the institutions. Also path dependency (Pierson, 2000) assumes that market economy is a singular institutional field but if we approach institutional systems as internally diverse, built by various fields, the game theoretic and path dependent assumptions become relaxed and less binding. For example, Thelen (2014) studying liberalization of CMEs noted that differential evolution of industries and services led to institutional change, i.e. society had separate institutional fields evolving separately.
2.5. Institutional heterogeneity, ambiguity and paths to dynamism of institutionalism
Institutional heterogeneity, ambiguity, imperfections and nature of institutions as inherently open social constructs elements of social reality, combining economic, political and social dimensions, together with uncertainty and bounded rationality of actors are essential for theoretical work to provide more dynamic theorizations of institutional systems. Schneiberg and Clements (2006, p. 210) argued “an appreciation of heterogeneity and the relative incoherence of fields is crucial - - - for empirical
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explorations of institutional change”, whereas Clemens and Cook (1999, p. 450-451) similarly argued ambiguous institutions, heterogeneous social structures and fragmentation (diversity) of social networks being important drivers of institutional change, while Streeck and Thelen (2005, p. 20) argued institutional systems are “never completely coherent”. Many authors have emphasized internal institutional heterogeneity of capitalism (Witt & Jackson, 2016; Lange, 2009; Lane & Wood, 2009; Lechevalier, 2007; Crouch, 2005; Streeck, 2004; Whitley, 1999; Friedland & Alford, 1991; Dunn &
Jones, 2010; Greenwood et al., 2011; Schneiberg, 2007; Allen, 2013; 2004; Deeg &
Jackson, 2006; Trigilia & Burroni, 2009), but however, the mere notion of heterogeneity and imperfection of institutions or synthesis of socio-political and socio-economic institutions is not enough as this has largely led to merely descriptive work of institutional diversity without much of theoretical work (Lechevalier, 2014). The theory of institutional diversity is essential to advance new institutionalism as an approach for studying the pluralist social systems of market economies. The institutional evolution should be approached, researched and theorized as “endogenous and historically open-ended but not random dynamic of structural-historical change, one that is path-conditioned but not path-determined” (Streeck, 2016, p. 4). Endogeneity is a foundational element for theories of institutions but it has been largely ignored by existing work. Also, different dimensions of institutional systems – political, economic, social – needs to be simultaneously theorized as complementary systems with feedback mechanism among material and symbolic dimensions (Friedland, 2009; Friedland & Alford, 1991, p. 243), as North (1990, p. 112) argued the polity and economy are interdependent with
“exchange relationships between the two”. Proper theory of institutionalism should co-fit agency and institutional structures without compromising one or the other, with an integrated approach where institutions are both endogenous and exogenous (Aoki, 2007;
Przeworski, 2004), and institutional systems are socially embedded – utility of actors depend on ability to cooperate with others (Granovetter, 1985; Hall & Gingerich, 2009) – with institutional equilibrium being economic, political and social, where interdependency among the dimensions provides stability as a system.
Existing work of new institutionalism has often avoided theorizing of how institutions change and when topic has been approached, each paradigm has often stayed within their
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conceptual framework as Thelen (2014, p. 218) has summarized existing work by stating that “institutions will evolve in response to (for functionalist theories) changes in the basic purposes around which politics is organized, (for power distributional theorists) a shift in the balance of power or in the goals of the powerful actors, and (for cultural theories) a change in the cultural script that defines what constitutes legitimate or modern organizational forms and routines”. New institutionalism and its three paradigms often avoid interaction between each other but there is potential for fruitful synthesis (Thelen, 1999). Hall and Taylor (1996, p. 938-951) argued the synthesis should be fertile as different approaches complement each other as rational choice institutionalism with focus on microfoundations and functionality provide dynamic understanding how institutions and actors operate (supporting theory-building) whereas sociological and historical institutionalism are more attuned to in-depth historical, social and political embeddedness of institutions and actors (Thelen, 1999). Also, the different paradigms discuss the same phenomenon, which is why they would benefit from synthesis (Campbell, 2004). However, critics have argued that methodological approaches cannot be co-fitted – phenomenology and social constructivism does not fit together with positivism and rational-functionalism (Haack & Schoeneborn, 2015; Streeck, 2007) – but even theory of social constructivism by Berger and Luckmann (1966) argued that ideational institutions initially aimed to cope with material reality and hence material, political and ideational elements interact with each other as for example Hall (2005) argued the institutional stability is due to creation of both distributional effects of providing economic rents and aggregate economic efficiency. Within sociology, work of Bourdieu (1977), Giddens (1984) and Fligstein and McAdam (2011) by field theories have effectively co-fitted material, political and social dimensions with certain laws of exchange between different forms of capital and mobility among the fields. Also Friedland and Alford (1991, p. 250) argue the different dimensions interact as institutional change is always “creation of both new social relationships and new symbolic orders”. Also, the comparative capitalism is an eclectic approach as a combination of paradigms of new institutionalism (Hall & Soskice, 2001; Hall, 2009;
Campbell, 2004; Aoki, 2013). Eclectic approaches emphasize that there is exchangeability among economic, political and social resources (see Bourdieu, 1977;
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Hall & Thelen, 2009; North, 1990). But the theories have often failed to properly incorporate different elements and how they are interchanged, and instead theories have often focused one of the dimensions while compromising the others.
Important work on more dynamic theories of endogenous institutional change has been provided by various scholars (e.g. Thelen, 2004; Campbell, 2004; Streeck & Thelen, 2005; Hancke, Rhodes & Thatcher, 2007; Mahoney & Thelen, 2009; Amable &
Palombarini, 2009; Baccaro & Pontusson, 2016; Capoccia, 2016) who all build on more empirically accurate notions of institutional systems being ambiguous, imperfect, socially constructed, political and internally diverse. Most of the theories emphasize the openness, ambiguity and uncertainty of institutions ensuring that not only institutional imperatives require constant interpretation and negotiation, but even concepts of compliance and enforcement are to certain extent problematic and require constant interpretation and bargaining among the actors (Mahoney & Thelen, 2009; Streeck & Thelen, 2005). Even the most formal institutions come with ambiguous expectations and “always are the subject interpretation, debate, and contestation” (Mahoney & Thelen, 2009, p. 10-11).
Ambiguity and uncertainty effectively lead to the institutions and institutional imperatives becoming more dynamic, without compromising structural nature of institutions, as they are constantly re-interpreted and re-negotiated leading to constant institutional evolution. Theory of gradual change (Streeck & Thelen, 2005; Mahoney &
Thelen, 2009) is an important advancement to new institutionalism as the theory empirically accurately theorizes how social systems are constantly evolving, constantly being reproduced in slightly different ways, and how also the constant evolution is necessary for the vitality of institutions. Gradual change elegantly also explains how continuous change operates without disrupting societies, moving from one behavioral model to a new one without notable friction (Streeck & Thelen, 2005, p. 4). Due to ambiguity and uncertainty of institutions, there is constant evolution to establish new functionalities and new purposes for the institutions (Streeck, 2004; Crouch, 2005;
Jackson, 2005; Vogel, 2005; Deeg & Jackson, 2007). Importantly, the gradual change combines notions of endogeneity, social embeddedness and institutions as economic, social and political constructs thus leading to holistic notion of market economies, but the theory of gradual change fails to incorporate economic and social motivations of actors as
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the theory relies on political mobilization of actors. Problem of overt emphasis of political nature of market economies (e.g. Mahoney & Thelen, 2009) also leads to inability to co-fit political and economic spheres, especially in terms of how politically motivated actors are able to achieve beneficial economic development. Also, the mere emphasis of politics is not enough as political disadvantage is not enough to foster institutional change as Friedland and Alford (1991, p. 246) exemplified how millions of disadvantaged women has not led to cultural transformation. Disadvantage requires recognition. Important contribution of gradual change as a theory is theorizing path ways of change as the theory theorizes that change occurs endogenously by modes of displacement, layering, drift, conversion and exhaustion with political mobilization as driver of change (Streeck & Thelen, 2005; Mahoney & Thelen, 2009). Displacement refers to emergence of new institutional solutions displacing existing ones, layering refers to adding new layers and evolution via differential growth, drift refers to eroding stability, conversion refers to redirection of institutions and exhaustion refers to self-undermining pattern of institutions (Streeck & Thelen, 2005; Mahoney & Thelen, 2009).
However, theory of gradual change is largely descriptive of how change occurs and fails to theorize when and why institutions change.
Gradual change as a theory also partly ignores the institutional diversity, which is a crucial omission as “without multiple institutional logics available to provide alternative meanings, subjects are unlikely to find a basis for resistance” (Friedland & Alford, 1991, p. 254). The multiplicity of institutional fields is essential to avoid the stasis of institutional equilibriums and path dependency of institutional systems. Exposure to alternative economic, political and social institutions empower agency of actors, fostering innovation and problem solving (Seo & Creed, 2002). Institutional diversity is also important providing spaces for experimentation, ecosystems of innovation, where actors are freer to explore institutional innovation and use these experimentation spaces to
“smuggle dissent into open” (Rao & Dutta, 2012, p. 626). The problem is however the need to co-fit agency and structures, as “without subjectivity, there is no way to account for change” (Friedland & Alford, 1991, p. 254), but emphasis of too much of agency leads to institutions being irrelevant. Dynamic theory of institutions requires more nuanced combination of agency and structures as firms are the drivers of institutional
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evolution (Hall & Thelen, 2009, p. 27; North, 1990, p. 73), but we need to understand how structures influence them. Potential solution can be found from co-fitting game theoretic approach with more realistic assumptions of institutional environment (e.g.
emphasize institutional diversity and ambiguity). Importantly the recent theoretical contributions have focused more on how interactions influence institutions as behavior and institutions are in a recursive relationship but this has not been researched so far very extensively, i.e. structures still dominate agency within theories of new institutionalism (Aoki, 2007; Mahoney & Thelen, 2009; Capoccia, 2016).
Lastly, agency is central for institutional change to occur and organizations coordinate institutional change by acting as ideational „focal points‟ (Schelling, 1960) to coordinate
„joint belief shift‟ in moving towards new ways of behaving (Culpepper, 2005; Aoki, 2007; Schmidt, 2008; Greif & Laitin, 2004; Blyth, 2002, p. 37-40). Especially new organization provide new ideas how to coordinate life within societies, and the ideas become imitated, adopted and copied if the new ideas are perceived successful and appropriate by the other actors (DiMaggio & Powell, 1983; Aoki, 2007). Importance of organizations is facilitating the process of coordinating collective change by acting as focal points of change (Aoki, 2007; Blyth, 2002), as “fundamental change, then, ensues when a multitude of actors switch from one logic of action to another” (Streeck &
Thelen, 2005, p. 18), where ecosystems are important for nurturing of new ideas and proto-institutions (Casper, 2007; DiVito, 2012; Lawrence et al., 2002, p. 282). However, acting as focal points is problematic as this requires specifying preferences of actors, as the preferences determine directionality of path trajectories (Katznelson & Weingast, 2005), but the preferences are shaped and constituted by institutions (Pierson & Skocpol, 2002; Friedland & Alford, 1991). The problem thus requires focus on dynamism of preference formation, where preferences originate from, how preferences evolve, especially in terms where innovative new transforming ideas to restructure societies come from and diversity is sustained and constituted endogenously within societies.
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