II. LITERATURE REVIEW
2.4. Path dependency, path trajectories and institutional equilibriums
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Lastly, sociological institutionalism argues that there are no universal reference frames (e.g. Friedland & Alford, 1991), but the interdependence of material, political and social dimensions of institutional system requires the institutional systems are dependent on material reality (Dunn & Jones, 2010; Waldorff, Reay & Goodrick, 2013; Haveman &
Rao, 1997; Greenwood et al., 2011). Lack of universal references frames cannot mean arbitrariness, and while social systems and institutions are often created for specific socio-political purposes, the social embeddedness and stability requires attaining at least certain level of material efficacy. Also, the example of organizations as strategic entities complying with social and political dimensions for the material gains effectively implies the different dimensions are deeply tangled, with material functionality as the underlying logic (Suchman, 1995; Friedland, 2009). New institutionalism, across the paradigms, generally perceive that material, political and ideational elements act together (e.g. Scott, 2008; DiMaggio & Powell, 1983; Aoki, 2007; North, 1990; Berger & Luckmann, 1966;
Bourdieu, 1977), but synthesizing work, despite of the potential benefits of novel innovative work (Thelen, 1999; Hall & Taylor, 1996), has not materialized.
2.4. Path dependency, path trajectories and institutional equilibriums
Institutional equilibriums are essential – they provide essential stability and structure for societies by making deviance costlier than compliance (e.g. Phillips et al., 2004). While equilibriums may be optimal efficient ways of coordinating cooperation among stakeholders (e.g. Levi, 1997), more empirically accurate is to conceptualize equilibriums as social and political constructs where resources of actors and historical social and political institutions shape the equilibriums (Amable & Palombarini, 2009; North, 1990).
Complementarities and coherence of institutional spheres are important for the functionality and stability of the institutional systems as incongruent incentives would contradict each other and be unsustainable (Becker, 2007), but complementarities, as argued, can be constituted by social and political institutions, where the complementarities reinforce the political and social outcomes of the institutions (Beckert, 2010), even solidify a socio-political compromise (Amable & Palombarini, 2009).
Moreover, while Varieties of capitalism approach emphasizes that institutions act as
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resources, “providing opportunities for particular types of action” (Hall & Thelen, 2009, p. 10), this does not equal to efficacy, but the institutionally structured ways of coordination can be entirely inefficient merely reproducing certain social and political aspects of social life, portraying certain behavior as legitimate and other behavior illegitimate (see Streeck & Thelen, 2005, p. 12-13). Due to social and political foundation of institutional equilibriums, there is possibility, even likelihood that persistently inefficient institutional equilibriums are sustained and reproduced (North, 1990, p. 95;
Acemoglu, Ticchi & Vindigni, 2011). While Hall (2009) argued the insertion of politics into game theoretic analysis of institutions as equilibrium leads to more dynamic outcomes, the political and social institutions are similarly self-reinforcing in an equilibrium situation – distributing power resources to those interest groups who favor these specific institutions – which thus does not lead more dynamic outcomes than the efficacy perspective. Important issue is that institutional imperatives induce actors to invest into institutional system specific assets, capabilities, political structures and socio-cognitive institutions, which lead to asset-specificity and dependence of actors on the continuity of the institutional arrangements which then makes institutional change incremental and path dependent (North, 1992, p. 15; Hall & Soskice, 2001).
Not only social systems are static because of institutions-as-equilibria creating conditions for self-reinforcing social order, but also institutions tend to have path dependent tendencies, which means the history and historical sequencing of institutional development matters as “what happened at earlier point in time will affect the possible outcomes of a sequence of event occurring at a later point in time” (Sewell, 1996, p. 262-263). Path dependence is a lengthy process where institutional heritage can influence over decades and centuries as example of social capital in Italy by Putnam (1993) suggests. Path dependence does not refer to a teleological development but instead means that history matters, earlier decisions influence benefits and costs of later decisions (Levi, 1997, p. 28). More precisely, path dependence means that institutional systems tend to follow path dependent trajectories due to increases of relative benefits of the chosen path trajectory in comparison to alternative paths (Pierson, 2000, p. 252). Benefits of the path trajectory are not merely material but also as path dependent paths reproduce distributional and cultural resources (Mahoney, 2000). Besides material costs, the
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alternative paths are costly as the current institutional path trajectory has influenced
“patterns of political mobilization, the institutional rules of the game, and even citizen‟s basic ways of thinking about the political world” (Pierson & Skocpol, 2002, p. 700).
Beyond efficacy, the institutional trajectories institutionalize the power relations among interest groups, i.e. solidified a socio-political compromise (Amable & Palombarini, 2009), structured how the political process occurs (how to challenge institutions), and even influencing how actors think. Path dependent influence on shaping cognitive capabilities of actors leads to paradox of institutional entrepreneurship as institutionalized actors are incapable of perceiving institutions as problematic (Seo & Creed, 2002).
Therefore, due to costliness of new paths the institutional development tends to follow path dependent trajectories as extensive literature of historical institutionalism has well-documented across market economies (e.g. Collier & Collier, 1991; Ertman, 1996;
Hacker, 1998; Pierson, 2000; Pierson & Skocpol, 2002).
The comparative studies of capitalism similarly argue that unique national institutional paths are path dependent, which leads to sustained institutional diversity instead of converge, but this is also theoretical short-coming as the theories are unable to theorize of institutional change beyond path dependent trajectories. For example, VoC perceives that due to efficacy benefits of complementarities the market economies would be incentivized to create similar complementary institutions in other institutional spheres (Hall & Soskice, 2001). However in Japan the institutional reforms led to a lack of complementariness, incoherent institutions, which was both sustainable and inefficient leading to two lost decades (Lechevalier, 2014). Organizations are important as they act as interest groups demanding creation of complementary institutions as well as engaging in supportive action protecting favored institutions (Höpner, 2005; Hall & Soskice, 2001;
Pierson, 2000, p. 255). Creation of complementary institutions would also be driven by social and political forces as social and political aspects would benefit from coherent institutional imperatives. While Greif and Laitin (2004) argued the quasi-parameters change along the game leading to changes in institutions, this is questionable as the institutions are likely to reproduce the quasi-parameters and sociopolitical stratification of the society. Moreover, changes in quasi-parameters takes decades making the theory of Greif and Laitin (2004) unable to grasp the continuous evolution of market economies.
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Thus, similar to institutions as equilibrium, the path dependency perceives that institutions rarely change due to costliness of alternative paths, which is driven by material, political and social factors. However, as empirical observations suggest institutional systems are constantly evolving, there has been demand to theorize of institutional change beyond constant slow path dependent changes. Punctuated equilibrium theory and critical junctures both perceive that institutional systems are path dependent and undergo long periods of near stasis until a rapid change emerges and institutional equilibrium becomes transformed and reconfigured (True, Jones &
Baumgartner, 2007; Tilcsik & Marquis, 2013; Pierson, 2000; Capoccia, 2016). Building on path dependency, both punctuated equilibrium theory and critical junctures perceive that certain historical events have long-lasting influences on institutional evolution as it is costly to alter or change the path (e.g. Collier & Collier, 1991; Pierson, 2000). Both theories are however limited as they perceive that institutional change occurs exogenously via shocks disrupting the stability and providing stimulus for change. While agency is almost entirely denied by these theories, the critical junctures are moments of amplified agency and freedom to bottom-up steering of institutional evolution as in those relatively brief moments of time the actors are presented with more extensive selection of behavior and the chosen behavior can influence long-term institutional trajectories (Capoccia & Kelemen, 2007, p. 348). Certain actors may have large scale, society wide long-term impacts in these moments (Capoccia, 2016; True et al., 2007). The problem is that agency is limited to specific temporal moments and assuming path dependency, the agency would be influenced even in those moments by the older existing normative and socio-cognitive institutions (Capoccia, 2016). Most crucially, the theories of punctuated equilibrium and critical junctures entirely ignore the constantly occurring evolution.
Lastly, the central problematic conceptual issue of institutions as equilibrium and path dependent punctuated equilibrium theoretical models is due to the implicit conceptual assumption that market economies are homogenous singular institutional fields with exceedingly perfectly operating institutions creating perfectly homogenous behavioral strategies. The conceptual assumptions of new institutionalism have been chosen to gain leverage to explain static behavior rather than achieving empirical accuracy (see Hall, 2009; Blyth, 2002, p. 17; Sewell, 1992, p. 16). Theoretical language due to its conceptual
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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.