The Dynamics of Institutional Change

The Dynamics of Institutional Change

Change is a complex and imperfectly understood phenomenon. We can confidently expect (and hope) that a significant portion of human behavior will remain outside the ability of social scientists to comprehend fully or to predict. The diversity of economic systems occurring within areas of roughly similar environmental conditions gives rise to the conclusion that we are dealing with a nondeterministic subject. We can only hope to sketch an outline of possible ways in which the process of change may occur.

Imagine first an economic system that is in equilibrium, meaning that whatever inconsistencies exist between economic institutions can be ex­plained away by appeals to tradition or to prevailing moral values with­out significant changes in the regular pattern of economic activity. Next, imagine a change either outside or inside the economic system—a series of bad harvests, for instance, or a decline in infant mortality—that creates basic inconsistencies between economic institutions.

Reactions to strain may take the form of unrest resulting from an unacceptable ratio of unemployment, or it may be felt in the rise of a new group of potential entrepreneurs. New political movements may spring up, or social deviance such as crime, alcoholism, or juvenile protest may increase. Whatever the form in which the strain manifests itself, the eco­nomic system must adjust to the situation before a new equilibrium can result.

Authorities within prevailing economic institutions can react to strain in either of two basic ways. First, they can attempt to repress it in various ways. Institutions for social control such as the court system or the police can be used; public opinion can be rallied in opposition; protest leaders may be discredited or coopted while their cause is given lip service. Second, they can accommodate existing institutions to ease the strain. Economic rewards may be shared with those who were formerly excluded, or new institutions may be created that allow the system to function smoothly once again.

Either solution creates indirect effects that cannot be fully antici­pated. Favorable positions in the economic hierarchy are usually not re­linquished voluntarily or without an attempt at least to mold new institu­tions to the advantage of those already holding economic power. The history of "reform" movements in the United States and other countries records the divergence between original ideals and actual results in such diverse areas as antitrust regulation, medical care, and civil rights.

As Karl Marx observed, change occurs through a dialectical process that incorporates neither the total result desired by the reformers nor the situation clung to by defenders of the status quo. Even "good" innovations such as the polio vaccine and the no-press shirt must have caused am­bivalent feelings on the part of artificial-lung manufacturers and hand laun­dry operators.

Once we recognize that situations of economic change both create new profit opportunities and threaten the economic and social positions of those holding economic power, the question of whether economic systems are "man-made" can be considered. Economic systems are man-made in the sense that change comes about through human actions; we can even agree that the greater the potential reward for "inventing" a new institu­tional form for achieving economic goals, the more likely that someone will discover a means of doing it. But we must also remember that bind­ing constraints on human inventiveness are operative in the inertia of tra­dition, in the obstructionism of vested interests, and in the feedback impacts on other institutions which economic change sets off. The amazing thing is not the unchanging aspects of economic systems; it is rather the ability of economic systems to adapt in the face of profoundly altered circumstances.

These circumstances, the facts of life to which economic systems must conform, include the principles of economics that should be included in a basic course in economics. These principles are derived from the es­sential fact that resources are scarce relative to the potential range of social and individual wants. Thus the concept of opportunity cost states that the true cost of devoting resources to one use lies in the output sacrificed from alternative uses; the concept of a production function relates output with required inputs, given the technology and organizational institutions that exist at a particular historical moment; and the principle of diminishing marginal utility states that additional satisfaction gained from consuming more of a given commodity occurs in smaller and smaller increments.