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«Inaugural-Dissertation zur Erlangung des Doktorgrades des Fachbereichs Wirtschaftswissenschaften der Johann-Wolfgang Goethe-Universität Frankfurt am ...»

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However, institutionalists look for patterns and therefore are open to a range of possible solutions. By contrast, mainstream economics is able to produce more rigorous, precise models and to make relatively precise and realistic predictions. But even so, ―[w]ithin institutional economics, indeed, there is no one theory, no one definition, no one concept, no one model, no one paradigm, no one sense of what constitutes the discipline that can answer every question we have all the time. Most importantly, there is no one answer, conclusive for all purposes and for all time, to any question‖.41 A definite advantage of American Institutionalism is its practical relevance, even though it is not defined in terms of policy proposals. It is also highly interdisciplinary, and therefore able to treat the economy as an evolving system that is embedded in an institutional environment of cultural, social and political relationships which shape individuals.42 By contrast, mainstream economic science ―has tended to become isolated from the other social sciences, and this isolation has hardened in the postwar period. In our journals and at our universities economists have worked in a purified model world, and even their empirical studies have borne the mark of self-sufficiency and sometimes sectarian arrogance‖.43 Institutionalists can be said to have the more honest approach to economics, but face a more or less irresolvable problem. In contrast to the general laws presented by mainstream, especially neoclassical, economics, they can only concentrate on very specific cases, treating specific institutions in specific environments during specific periods of time. Their findings thus cannot be generalized, but if one is more interested in understanding how the real world works, this approach provides more insight than mainstream economics. Furthermore, institutional economics seeks to overcome disciplinary boundaries between social sciences. It strives to establish a dialogue between disciplines like sociology, politics and even biology, since each of these subjects can make valuable contributions to the understanding of economic phenomena and the nature, evolution and economic effects of institutions. However, it can be argued that institutionalism is more a part of sociology than Wilber, 1978, p. 84.

Samuels, 2000, p. 310.

Lawson, 2005, p. 8, Hodgson, 2000, p. 318.

Myrdal, 1978, p. 783. Even when collaborating with other sciences like psychology in areas such as behavioral or experimental economics, it does so in a very formalistic and limited manner that, for example, treats an individual as a rationally-bounded homo economicus.

of economics; and indeed economic sociology assumes an institutional perspective which is, however, based on NIE.44 Thus, if a science is defined by the type of method or analysis it applies, and if this were the assumption of individual utility maximization, then it is undeniable that institutional economics cannot be called economics. If however a science is defined as the study of a real object, which in case of economics would obviously be the economy, then there is no doubt that institutionalism is economics, since it analyzes aspects of the economic system. ―The strength of institutional economics lies in the explanatory power of its ideas, not the force of its numbers‖.45 However, this is not to deny that mainstream economics, and neoclassicism in particular, is sometimes great use in describing certain economic processes; but it is less useful than institutional economics in picturing the complexity of the transformation of an economic system. The ―comparative advantages of institutionalism are the breadth of factors and forces it is willing to consider, including institutional and historical details; its evolutionary paradigm; and its emphasis on adjustment processes in a nonjudgmental manner, in contrast to the neoclassical fixation on determinate optimal equilibrium solutions‖.46 Despite the methodological difficulties this dissertation treats institutional economics as a more valuable theoretical background for my analysis of Capitalism and the Chinese economic system than mainstream economics. However, the chapter on Capitalism (chapter 4) will also cover the so-called Varieties of Capitalism (VoC) approach, based on neoclassical economics. In the following the methodological advantages of institutionalism will be dealt with in detail. Together with the theoretical frameworks outlined in chapter 3 and 4 it will become clearer why it has been chosen as the instrument to analyze the Chinese economic system, and the form of Capitalism there developing.

2.2. Institutions: a definition Definitions of institutions are manifold.47 There is no single agreed characterization of the term, although a definition as building-blocks of social order would be widely accepted. As such they are socially sanctioned, collectively enforced expectations of a certain behavior of actors. This behavior can be categorized as appropriate and inappropriate, or Besides economic sociology, the American Institutional School can also be considered as the origin of evolutionary economics, and ultimately also as part of the Neo-Schumpeterian School. However useful the insights of those schools may be, their theoretical insights will not be covered in depth within this thesis.

They will only be briefly touched in chapter 4 (particularly in fn 588).

Miller, 2003, p. 51.

Samuels, 1995, p. 580.

Summary for example in Djelic, 2010, p. 25ff.

even ‗right‘ or ‗wrong‘, resulting in reliable, stable patterns of behavior. To put it differently, institutions are legitimate rules for behavior. Institutions can also be corporate actors or organizations, to the extent that their existence is publicly guaranteed and backed by societal norms and enforcement capacities. An institution is then seen as the equivalent of a social regime.48 In Douglass C. North terms ―[i]nstitutions provide the framework within which human beings interact. They establish the cooperative and competitive relationships which constitute a society and more specifically an economic order‖.49 Hence, they can also be interpreted as ―rules of the game of society‖ or ―humanly devised constraints imposed on human interaction‖.50 An institutional formation defines the incentive structure of society as well as the interactions of human beings in reducing ubiquitous uncertainty, such that the intentions of individuals linked to the institutional rules are realized.51 Institutions are incentive systems, but imperfect ones. The resultant institutional matrix is a combination of formal rules, informal constraints and their enforcement characteristics. Formal rules include constitutions, laws and regulations whereas informal constraints would be norms of behavior, conventions or codes of conduct. Informal rules are regarded as more important than formal ones. Over time, institutional constraints accumulate and the culture of a society is nothing else than the ―cumulative structure of rules, norms and beliefs that we inherit from the past, that shape our present and that influence our future‖. Culture tells us ‗how to play the game‘ and incentives vary with the institutional environment. A change of institutional structures can occur by an alteration of one of the three elements from which institutions are constituted: formal rules, informal norms or their enforcement mechanisms.

North here emphasizes the significance of path dependence, which constantly constrains the gradual changes of institutions and thus the choices of society (see also below).52 Political and economic actors (or ‗entrepreneurs‘ in North‘s terms) with the power of changing policies have a certain belief structure that strongly influences the resultant institutional structure of society and its performance. It limits the freedom of choice of actors who aim to alter existing institutions, or create new ones. Therefore it proves difficult to change existing political and economic environments. North argues that path dependence necessarily leads to incremental, but at the same time continuous, change. Consequently, North is Streeck and Thelen, 2005a, p. 9f.

North, 1981, p. 201.

North, 1990, p. 3. This is also the most common definition of institutions in neo-institutional economics in general.

North, 1999, p. 9f.

North, 1999, p. 14f., North, 2005b, p. 129, 131, 137.

also critical of the concept of ‗social engineering‘, which implies that the same set of institutions can in principle be realized anywhere de novo (please refer also to chapter 5.1.). He also maintains that this is especially true for economic orders, in the sense that the same economic order cannot be implemented in all places. Institutions form a specific incentive structure and construct specific organizations. Within this distinctive matrix political actors decide on the economic rules of the game. The actual rate of change may ―depend on the degree of competition among organizations and their entrepreneurs‖. Actors within an organization react like players in a game who obey its rules, therefore its institutional constraints.53 North argues in accordance with NIE, hence with the aid of neoclassical economics.54 In this context institutions are also considered as ―not only endogenous equilibrium strategies, but more specifically as political-economy equilibriums, i.e. as the outcome of strategic interactions among agents in a specific power structure‖.55 Another recent development within institutionalist political economy employs the concept of institutions as ―Weberian Herrschaftsverbände‖ that connect rule makers and rule takers who interact within a society defined as a surrounding environment of ―third parties‖. This approach thus defines institutions as regimes.56 The distinction of rule makers governing the behavior of rules takers is often merely analytical since in reality both may be identical, especially in democratic orders. Rule makers create and enforce ―a normative order that is sanctioned by the society at large‖.57 Weber‘s concept differentiates between on the one hand rule makers and rule takers; and on the other between institutions defined as social structures linked to actors whom they at once constrain and enable, in combination with norms of behavior and actors‘ obedience to them. Ideally, institutions constrain the behavior of actors through their rules. This can only occur if actors internalize and obey these rules ―voluntarily out of self-interest". However, actors in the role of rule takers may object to certain rules or strategically counteract specific institutions. This system of governors and governed produces a unique institutional formation, requiring creative understanding of the meaning and relevance of its rules in specific situations.58 It is a perspective that is also particularly useful for analyzing institutional change (see 2.4.) Even when rules are perfectly and completely followed, the need to adapt existing North, 1999, p. 11, North, 2005b, p. 138f.

Especially in North, 1981.

Amable, 2003, p. 35.

Streeck, 2010a, p. 5.

Streeck, 2010a, p. 5.

Streeck, 2010a, p. 5.

institutions innovatively to fit specific situations and changing environments arises over time, which means that institutions are necessarily continuously reinvented. Institutions and their rules are constantly interpreted and bent by rule takers in ways that were ex ante impossible to foresee for the rule makers. Thus, certain rules create outcomes that may have not been intended by the rule makers and over time these need to be adjusted either to meet the new circumstances, or to be revised to fit to the original purpose. ―Thus, not only rule-breaking, but also rule-following tends to set in motion interactive processes between rule makers and rule takers which make the institution and its meaning evolve over time….[T]he reproduction of any social order can only be an imperfect one;…all socialinstitutional orders are always in flux; and…slow and gradual change is an ever-present condition in institutional structures‖.59 This again also means that a social order can never be perfectly reproduced elsewhere. In the case of capitalist orders, actors ―are socially constructed as constitutively devious by the institutions designed to govern them. The typical

rule taker that capitalist institutions must reckon with as the normal case is a rule bender:

She reads rules entrepreneurially, untiringly looking for ways of twisting them in her favor‖.60 Analytically, it can be differentiated between the rule itself and its implementation.

The friction between these two, and hence between the ideal and the real pattern of a rule, gives actors the possibility of gradually and endogenously changing existing institutions via direct feedback between rule takers and rule makers.61 Streeck divides institutions into so-called Durkheimian62 institutions of classical sociology and the Williamsonian63 institutions of modern institutional economics. He regards the transformation towards more liberal forms of Capitalism in advanced industrial countries as one from Durkheimian to Williamsonian institutions, hence a ―transition from organized to disorganized, from nonliberal to liberalized capitalism‖. He defines Durkheimian institutions as authoritative organizations that ensure a public order of obligation, enforced by third parties (the society as a whole), and hence imposed exogenously.64 Institutions in Durkheim‘s sense are normative social structures which regulate and limit the behavior and pursuit of the material interests of actors based on legitimate authority and arising from collective action. While this kind of institution may also contain markets, they do not oriStreeck, 2010a, p. 5, incl. fn 3. Similar in Streeck and Thelen, 2005a, p. 13f.

Streeck, 2010a, p. 10. See also below and chapter 5 and 8 as examples for that.

Streeck and Thelen, 2005a, p. 13f.

Referring to Émile Durkheim, a French sociologist, 1858-1917. Information taken from Archives Biographiques Françaises (ABF), accessed online 5 December 2010.

Referring to Oliver E. Williamson, one of the major advocates of institutional economics and a Nobel laureate.

Streeck, 2010a, p. 17f.

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