Tuesday, October 25, 2011

Our Path-Dependent Future: What Happens When Change and Habit Collide?

In 2007 and 2008, then Senator Barack Obama ran on a campaign slogan: “Change you can believe in.” Obama’s campaign asserted that his election would rectify the metastasizing wealth gap between the rich and the poor, address the high unemployment rate, and restore America to the “shining city on a hill” that it once was. While one can debate whether or not Obama used cynical sloganeering or if he earnestly intended to implement such change, the study of change in political science could have served President Obama well. Within the political science discipline there are several schools of thought regarding institutional change. Mahoney and Thelen and the broader rational choice school of institutionalism present a starkly different account than the work of Pierson and other historical institutionalists who employ a path-dependency approach. These differing approaches have important consequences for those who desire to initiate or foster institutional or systemic change. Ultimately, the insights of Pierson and historical institutionalism provide more compelling arguments than those proffered by Mahoney and Thelen or the rational choice institutionalists.

According to Mahoney and Thelen, institutions, once created, tend to change “in subtle and gradual ways over time." Harnessing the example of the British House of Lords, the authors explain how these piecemeal changes can, over time, lead to the fundamental restructuring of institutions, political outcomes, or human behavior. Most of the pre-existing literature on institutional change indicts “exogenous shocks” as the cause (IV) of institutional change. The main institutionalist schools—historical, sociological, and rational choice—all explain continuity well, Mahoney and Thelen suggest, but provide little in the way of understanding how gradual institutional change occurs. Mahoney and Thelen conceive of “institutions as distributional instruments laden with power implications." Institutions are replete with contestation over resource allocation and attendant distributional consequences, both in an inter- and intra-institutional sense. For Mahoney and Thelen, institutions “contain within them possibilities for change." “What animates change is the power-distributional implications of institutions,” they aver.

Mahoney and Thelen place paramount importance on the role of compliance amongst actors within an institutional context. This power-distributional approach is buttressed by an emphasis on compliance because “institutional ‘winners’ and ‘losers’ have different interests when it comes to interpreting rules or dedicating resources to their enforcement." Mahoney and Thelen posit four types of change that are all initiated by efforts of different actors through their degree of compliance. The four types of institutional changes are: 1) displacement- when existing rules are replaced by new ones; 2) layering- new rules are attached to existing ones; 3) drift- rules remain formally the same but their impact changes; and 4) conversion- rules remain the same but are interpreted and enacted differently. These different types of institutional change are affected by “differences in veto possibilities and the extent of discretion in institutional enforcement and interpretation.” In other words, veto players or veto points affect which type of institutional change may occur. For example, if veto possibilities (strong veto actors and/or numerous veto points) are high, then displacement change is highly unlikely.

The authors also add four types of change agents to their schema: 1) insurrectionaries- they seek to eliminate existing institutions; 2) symbionts- they thrive on institutions, but not of their own making; 3) subversives- seek to displace an institution but their actions do not break the rules; and 4) opportunists- actors with ambiguous preferences about institutional continuity. Change agents exploit differences in levels of discretion in the interpretation or enforcement of rules in order to meet their goals. Each type of change agent is also likely to pursue different types of change. For example, insurrectionaries are generally linked to efforts at outright displacement.

If one looks at the interpretation and enforcement of various institutions across different presidential administrations, Mahoney and Thelen’s account appears compelling. One administration more zealous in its enforcement labor laws may staff an organization like the National Labor Relations Board (NLRB) with pro-union officers, while an administration less friendly to labor may appoint pro-business officers. The mandate of the Board remains the same, however, the enforcement and interpretation, or the willingness of the officers of the organization to comply, may change the way the institution operates. Over time, this may lead to any of the several different types of change Mahoney and Thelen describe.

The rational choice approach to institutionalism utilizes a set of assumptions regarding human behavior and imposes those assumptions on the study of institutions and change. Adherents to rational choice institutionalism view actors as having a “fixed set of costs or tastes” who behave strategically to acquire these preferences. They see politics as collective action dilemmas where the decisions of utility-maximizing individuals produce outcomes that are “collectively suboptimal.” Actors’ behavior is driven by strategic calculations based on expectations of others’ actions. Institutions work to, and in fact originate as, mechanisms for creating stable expectations and structuring interactions.

The work of Anthony Downs on political parties epitomizes the rational choice model. He constructs a model where rational citizens seek to maximize their self-interest and rational politicians aim to acquire and maintain power. The calculations of rational, utility-maximizing individuals determine institutional changes. Changes in party systems or specifically to the party in power are driven by strategic calculations to attain one’s preferences. Another influential rational choice theorist, Douglass North, couches the discussion of institutional change in economic terms. North asserts, “ a change in relative prices leads one or both parties to an exchange, whether it is political or economic, to perceive that either or both could be better with a negotiated contract.” The successful re-negotiation of the contract results in institutional change. Conversely, institutional stability “derives from the fact that there are a large number of specific constraints that affect a particular choice.” These myriad constraints impinge on the type of actions that an actor can undertake. Therefore, “only when it is in the interest of those with sufficient bargaining power to alter formal rules will there be major changes in the formal institutional framework.” In other words, North asserts that those with the greatest leverage will only work to modify, supplant, or create new institutions if there is a rational calculation on the part of the hegemonic actors that they can form new, more beneficial institutions.

In his essay “Increasing Returns, Path Dependence, and the Study of Politics,” Pierson argues for the concept of path dependence and adds an important concept, that of “increasing returns,” to the study of change and institutions. According to Pierson, path dependence is rooted in several particular claims. In sum, history and temporal sequence matter; “large consequences may result from relatively ‘small’ contingent events;” particular courses of action can be irreversible; and as a result “political development is often punctuated by critical moments or junctures that shape the basic contours of social life.” To these traditional tenets of path dependence, Pierson adds the concept of “increasing returns” which contains “two key elements central to…path dependence.” First, increasing returns helps to explain how the cost of switching from one institution to another can be very high. Moreover, the longer an institution operates the higher the transaction costs of the exit option will be. Secondly, issues of temporality and sequence are important: “it is not only a question of what happens but also of when it happens.” Increasing returns assumes that the further down an institutional path the more likely it is that that path will continue to be used. This cultivates a self-enforcing, positive feedback process. Critical junctures and initial decisions have a much larger impact on the trajectory of an institution. The farther along the trajectory, the less likely decisions or events are to have impact.

Pierson’s argument has several important implications regarding the nature and study of change in institutions. For Pierson, “public policies and (especially) formal institutions are change-resistant” because both are “generally designed to be difficult to overturn.” This is because those who design the institutions wish to enshrine certain immutable features that will handcuff their successors. Secondly, “political actors may wish to bind themselves” because they may perform better “if they remove certain options from their future menu.”

The path dependent, increasing returns approach that Pierson utilizes is both historical and institutional. Institutional change is a difficult process that, depending on the timing and sequence, can have nearly insuperably high exit costs. Such costs can often lead to inertia as the positive feedback processes reinforce equilibrium and militate against the possibility of change. Moreover, relatively small events prove to be critical junctures that shape institutions for years to come. Pierson provides the example of comparative political economy and the varieties of capitalism to illustrate his point. He asserts that the literature in this field positively identifies the manifold distinctions between capitalist economies but does not address how these equilibria emerge. National economies are embedded in their social context, varying modes of production, “formal and informal arrangements (both public and private) that help structure their interactions,” and particular national institutional matrices. Thus capitalism in different states, and national economies in general, are “highly path dependent. They are likely to exhibit substantial resilience, even in the context of major exogenous shocks…”

In a more specific contemporary context, Herman Cain, an aspiring Republican presidential nominee, has tabled a new tax reform plan called “9-9-9” (it calls for a 9 percent sales, income, and corporate tax across the board). This plan would obliterate the current tax code. The problem with the plan is that it would not provide enough revenue that the federal government requires. Current federal government outlays for entitlements, defense, and discretionary spending require far more revenue than this plan could generate. Therefore, Cain would not only need to restructure the tax code to implement his plan, but fundamentally alter how the federal government operates. Say what you will about the current byzantine tax code, but the exit costs of dismantling the current institution, from a path dependent standpoint, strongly work to produce policy inertia in this regard.

Mahoney and Thelen and rational choice institutionalists provide a starkly distinct account of institutional change from that of Pierson and others who employ historical institutionalism. Whereas Mahoney, Thelen and North suggest that change is incremental, historical institutionalists tend to see periods of punctuated equilibrium where “change takes place thereby creating a ‘branching point’ from which historical development moves onto a new path.” I find the path dependent approach most compelling and useful. A particularly pertinent example of the convincing nature of path dependency is US tax policy. The United States was founded in part as a country opposed to “taxation without representation” that was imposed by King George III. This aversion to taxes still resonates with the citizenry today as politicians appeal to American history in order to garner support for particular policy outcomes. Efforts to create fundamentally new institutions, such as a single-payer healthcare system, are often disrupted by existing institutions that would experience high transaction costs (such as the pharmaceutical or health insurance industries) from exiting the current system. New institutions, such as the emergence of social security in the United States, have frequently emerged in response to or during critical junctures. Moreover, the debate as to what to do with social security, as it may potentially run insolvent in the decades to come, is colored with the language of increasing returns. Advocates for the current system essentially appeal to the argument that the exit costs to senior citizens and the national economy are simply too high to change the institution.

It seems to me that Mahoney and Thelen and the rational choice school in general have a tendency to overemphasize the role of individuals in affecting, producing or initiating change. There are larger historical and structural factors from war to international trade to ideology that can prevent individuals from not only acting strategically or rationally, but also render them incapable of fostering institutional change. Individuals, even powerful individuals like Presidents and Senators, frequently have their agendas or policy prescriptions thwarted by institutions whose perpetuation is a far simpler course of action to take. While I sympathize with Mahoney and Thelen’s argument and see its utility in regards to smaller institutional issues of enforcement and interpretation, I do not think that it can adequately account for fundamental institutional change. Institutional change may be piecemeal, but that does not necessarily mean it is because of the compliance of change agents. External historical and structural factors play a role in institutional change as well. Presidential candidates would be well served by understanding this model of institutional change. Such understanding could potentially prevent candidates from promising transformational change in a four-year term.

I would like to end by referring back to Pierson’s cursory discussion of varieties of capitalism and national economies. Capitalism is an historical institution that is highly path dependent; despite its manifold negative consequences (economic exploitation, rampant consumerism, environmental degradation, etc.) it remains the dominant political economic force in the world. How does a change in such a world-system occur? The path dependency argument would postulate that only through change implemented during a critical juncture, such as continued environmental catastrophes or a people’s revolution, could change occur that would cultivate new economic institutions. Perhaps, this is what we are beginning to see with the proliferation of the “occupy” movements.

Adam Gallagher

Further Reading

Hall, Peter A. and Rosemary C.R. Taylor. “Political Science and the Three New Institutionalisms.” Political Studies 44 (1996): 952-73.

Katznelson, Ira. “Was the Great Society a Lost Opportunity?” in The Rise and Fall of the New Deal Order, eds. Steve Fraser and Gary Gerstle.  Princeton, NJ: Princeton University Press, 1989.

James Mahoney and Kathleen Thelen, "A Gradual Theory of Institutional Change," in  Explaining Institutional Change: Ambiguity, Agency, and Power, eds. Mahoney and Thelen.  Cambridge: Cambridge University Press, 2010.

North, Douglass. Institutions, Institutional Change, and Economic Performance. Cambridge: Cambridge University Press, 1990.

Pierson, Paul. “Increasing Returns, Path Dependence, and the Study of Politics.” American Political Science Review 94: 2 (2000): 251-67.

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