Institutionalism and Social Sciences

I. INTRODUCTION:

In the 1890’s classical economics had almost completely disappeared from the scene. In fact beginning from that decade the external attacks against political economy became criticisms of neo classical economics and this happened in America with the institutionalist schools. According to Veblen Institutions are place of socially shared mental habits. After the post war periods, focus of Institutionalisms moved to analysing the individual rather than the institutions which surrounded him/her. In the 1980s however, new institutionalism, sometimes called 'neo-institutionalism', has seen a revived focus on the study of institutions as a lens for viewing work in number of disciplines including economics, sociology, international relations and political science. New institutionalism was born out of a reaction to the behavioural revolution and based on which the Washington Consensus describes the important reforms under neo-institutionalism. Institutionalism advocates removing the colossal deprivation that exists in the country (like India) to make it a “less unjust” society.

II. THORSTEIN VEBLEN:

The line of thought of Institutionalism was initiated by Veblen in the 1890’s. In order to have a better understanding we need to take a glance at the course of America’s economic history most from 1880 to 1915 which corresponded to the most active period of the intellectual carrier of “THORSTEIN VEBLEN” the ‘founder’ of institutionalist approach.

Veblen developed a radical critique of all orthodox economic theory, from Smith onwards, putting both classical and neoclassical economists in the same basket. It was in fact Veblen who branded Marshall’s theoretical system with the term ‘neoclassical’. According to Veblen human behaviour is governed by basic instincts and the propensities to action which are formed both by nature and the institutions, the latter being defined as socially shared mental habits. According to Veblen economics should instead be an evolutionary science and study social change in Darwinian terms. He also elaborated a ferociously critical analysis of the real economic system his times, that is, in point of fact, American capitalism at the centre of Veblen’s analysis of capitalist society was the distinction between ‘industry’ and ‘business’. The former ‘produced things’ and the latter ‘produced money’. The active agents of industry are engineers and allied professionals: the active subjects of the business world are merchants and speculators. The first group is motivated by the instinct of workmanship and idle curiosity, the second group compete with each other in terms of ‘conspicuous consumption’, a type of consumption that does not satisfy real needs but only feeds the desire to display one’s status in the eyes of a social reference group. It was in his famous book “The Theory of Leisure Class [1899] “that Veblen applied his social theory to the way of life of the average American consumer. Here he showed how the instinct towards hard work could become atrophied by emulating the ‘predator’ (the successful businessman) and how the natural requirement of need satisfaction could be distorted by conspicuous consumption.

Veblen believed that technology is the major factor in socio economic growth, and that it is cumulative and independent of the actions and the will of the businessman. However he was convinced that technical progress, when is abused by predatory instincts, is accompanied by institutional changes which would lead the economy both to a state of chronic depression and to monopolistic concentration. This state of affairs would intensify the struggle between industry and business. Veblen himself was not too clear about where such a fight would lead. However, in the final section of The Theory of Business Enterprise (1904) he wrote : ‘Which of the two antagonististic factors may prove the stronger in the long run is something of a blind guess……It seems possible to say this much, that the full dominion of business enterprise is necessarily a transitory dominion’. This uncertainty persisted in Veblen’s thought almost until he died. In Economic Theory in the Calculable Future (1925) he appears to suggest that the business world will prevail – from which he inferred sad omens for economic science.

In spite of difficulties of sometimes archaic language, caused in large part by Veblen’s struggles with the terminology of unilinear evolution and of biological determination of social variation that still dominated social thought when he began to write, Veblen’s work remains relevant, and not simply for the phrase “conspicuous consumption.” His evolutionary approach to the study of economic systems is once again in vogue and his model of recurring conflict between the existing order and new ways can be of great value in understanding the new global economy.

III. NEO INSTITUTIONALISM:

In Britain and America, the study of political institutions dominated political science until after the post-war period. This approach, sometimes called 'old' institutionalism, focused on analysing the formal institutions of government and the state in comparative perspective. After the behavioural revolution brought new perspectives to analysing politics such as positivism, rational choice theory and behaviouralism, the focus on institutions was ditched since it saw politics as too narrow. The focus moved to analysing the individual rather than the institutions which surrounded him/her.

In the 1980s however, new institutionalism, sometimes called 'neo-institutionalism', has seen a revived focus on the study of institutions as a lens for viewing work in a number of disciplines including economics, sociology, international relations and political science. John W. Meyer proposed an early influential formulation (Meyer and Rowan 1977). Authors like Paul DiMaggio and Walter W. Powell consciously revisited Weber's iron cage in the early 1980s (DiMaggio and Powell 1983, 1991). The following decade saw an explosion of literature on the topic across disciplines. DiMaggio and Powell's 1991 anthology summarizes work in sociology. In economics, the new institutionalism is most closely associated with Washington University in St. Louis, Missouri, where Douglass North, who won a Nobel Prize in 1993 for his work in new institutionalism, currently teaches

Introduction to new institutionalism

New institutionalism recognizes that institutions operate in an environment consisting of other institutions, called the institutional environment. Every institution is influenced by the broader environment (or in simpler terms institutional peer pressure). In this environment, the main goal of organizations is to survive. In order to do so, they need to do more than succeed economically, they need to establish legitimacy within the world of institutions.

Much of the research within New Institutionalism deals with the pervasive influence of institutions on human behaviour through rules, norms, and other frameworks. Previous theories held that institutions can influence individuals to act in one of two ways: they can cause individuals within institutions to maximize benefits (regulative institutions), similar to rational choice theory or to act out of duty or an awareness of what one is "supposed" to do (normative institutions). An important contribution of new institutionalism was to add a cognitive type influence. This perspective adds that, instead of acting under rules or based on obligation, individuals act because of conceptions. "Compliance occurs in many circumstances because other types of behaviour are inconceivable; routines are followed because they are taken for granted as 'the way we do these things'" (Scott 2001, p. 57). Individuals make certain choices or perform certain actions not because they fear punishment or attempt to conform; neither do they do so because an action is appropriate or the individual feels some sort of social obligation. Instead, the cognitive element of new institutionalism suggests that individuals make certain choices because they can conceive of no alternative.

For an interesting application of the new institutional approach see Terry Karl (1990), this portrays institutions as constraining elite actors’ preferences and policy choices during transition. The focus upon economics in this article is misleading; institutions are politics: they are the substance of which politics is constructed and the vehicle through which the practice of politics is transmitted. New institutionalism was born out of a reaction to the behavioural revolution. In viewing institutions more widely as social constructs, and by taking into account the influence that institutions have on individual preferences and actions, new institutionalism has moved away from its institutional (formal legal descriptive historical) roots and become a more explanatory discipline within politics.

More recent work has begun to emphasize multiple, competing logics (Friedland & Alford, 1991; Lounsbury, 2007), focusing on the more heterogeneous sources of diversity within fields (Lounsbury, 2001) and the institutional embeddedness of technical considerations (e.g., Scott et al., 2000; Thornton, 2004). The concept of logic generally refers to broader cultural beliefs and rules that structure cognition and guide decision-making in a field. At the organization level, logics can focus the attention of key decision-makers on a delimited set of issues and solutions (Ocasio, 1997), leading to logic-consistent decisions that reinforce extant organizational identities and strategies (Thornton, 2002). In line with the new institutionalism, social rule system theory stresses that particular institutions and their organizational instantiations are deeply embedded in cultural, social, and political environments and that particular structures and practices are often reflections of as well as responses to rules, laws, conventions, paradigms built into the wider environment (Powell, 2007).

Sub-fields of the new institutionalism

New institutionalism can take different focuses and can draw its inspiration from different disciplines. Here are some types of new institutional study.

· Normative institutionalism

Normative institutionalism is sometimes seen as the "original" new institutionalism; much of the introduction of this article relates to a normative view of institutionalism. A sociological interpretation of institutions, normative institutionalism holds that a "logic of appropriateness" guides the behaviour of actors within an institution. The norms and formal rules of institutions will shape the actions of those acting within them.

This approach can be readily contrasted with rational choice institutionalism: rather than a series of calculated actions designed to maximise perceived benefit, any given actor within an institution will feel to some extent constrained and obligated by the norms and rules of the institution.

Normative institutionalism is referred to by Hall and Taylor (1996) as "Sociological institutionalism". It defines institutions much more broadly than political scientist or economist and it includes also the symbol systems, cognitive scripts and moral templates, hence it breaks down the divide between 'institutions' and 'culture'.

· Rational choice institutionalism

Rational choice institutionalism draws heavily from rational choice theory, but is not identical to it. Proponents of this theory argue that political actors' rational choices are constrained ("bounded rationality"). Rational choice theory also argues that institutions are rules that govern the behaviour between individuals and that actions are made in interest of the self.

· Historical institutionalism

As the name suggests, this version of institutionalism states that "history matters." Paths chosen or designed early on in the existence of an institution tend to be followed throughout the institution's development. Institutions will have an inherent agenda based on the pattern of development, both informal (the way things are generally done) and formal (laws, rule sets and institutional interaction.)

A key concept is path dependency: the historical track of a given institution or polity will result in almost inevitable occurrences. In some institutions, this may be a self-perpetuating cycle: actions of one type beget further actions of this type.

This theory does not hold that institutional paths will forever be inevitable. Critical junctures may allow rapid change at a time of great crisis. Karl Marx argued that institutionalism is a dogmatic theory.

· Constructivist institutionalism

Recently, a number of authors have used the term "constructivist institutionalism “or "discursive institutionalism" to describe an approach which "lends insight into the role of ideas and discourse in politics while providing a more dynamic approach to institutional change than the older three new institutionalisms".

· Interdisciplinary relevance

This way of understanding individual choice is also relevant to economics. New institutionalists in economics recognize that institutions have at least as much influence on the economy as individual's choices.

Critiques of new institutionalism

New Institutionalism is often contrasted with "old" or "classical" institutionalism, the latter of which was first articulated in the writings of John Dewey, Thorstein Veblen, John Commons, and others, and which has been further extrapolated by various philosophers and scholars such as Donald Davidson, Richard Rorty, Amartya Sen, Donald McCloskey, Warren Samuels, Daniel Bromley, EJ Mishan,Yngve Ramstad, and others. Proponents of the older institutionalism are strongly opposed to new institutionalism, most saliently in the manner in which new institutionalism seeks to explain institutional change as merely another instance of maximization. Instead, old institutionalism seeks to articulate reasons for institutional change in terms of social and political volition.

IV. WASHINGTON CONSENSUS:

Washington Consensus is an inevitable topic when a discussion on institutionalism is to be done. The term Washington Consensus was initially coined in 1989 by John Williamson to describe a set of ten specific economic policy prescriptions that he considered should constitute the "standard" reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the International Monetary Fund (IMF), World Bank, and the US Treasury Department.

These ten reforms were:

1. Fiscal Discipline -: This was in the context of a region where almost all the countries had run large deficits that led to balance of payments crises and high inflation that hit mainly the poor because the rich could park their money abroad.

2. Reordering Public Expenditure Priorities -: This suggested switching expenditure in a pro-poor way, from things like indiscriminate subsidies to basic health and education.

3. Tax reform-: Constructing a tax system that would combine a broad tax base with moderate marginal tax rates.

4. Liberalizing Interest Rates-: Interest rates that are market determined and positive in real terms

5. A Competitive Exchange Rate -: Keeping competitive exchange rates within the country.

6. Trade Liberalization-: Liberalizing trade by removing or lessening restrictions on imports and tariffs

7. Liberalization of Inward Foreign Direct Investment-: Liberalizing foreign investment opportunities.

8. Privatization-: Privatizing enterprises run by the state.

9. Deregulation-: This focused specifically on easing barriers to entry and exit, not on abolishing regulations designed for safety or environmental reasons.

10. Property Rights-: This was primarily about providing the informal sector with the ability to gain property rights at acceptable cost.

The three big ideas here are macroeconomic discipline, a market economy, and openness to the world (at least in respect of trade and FDI)

The widespread adoption of the Washington Consensus, by governments was to a large degree a reaction to the macroeconomic crisis that hit much of Latin America, and some other developing regions, during the 1980s.

Criticisms of Washington Consensus

The reforms did not always work out the way they were intended. While growth generally improved across much of Latin America, it was in most countries less than the reformers had originally hoped for. Success stories in Sub-Saharan Africa during the 1990s were relatively few and far in between, and market-oriented reforms by themselves offered no formula to deal with the growing public health emergency in which the continent became embroiled. The critics, meanwhile, argue that the disappointing outcomes have vindicated their concerns about the inappropriateness of the standard reform agenda.

The World Bank's report Learning from Reform shows some of the developments of the 1990s. There was a deep and prolonged collapse in output in some countries making the transition from communism to market economies. More than a decade into the transition, some of the former communist countries, especially parts of the former Soviet Union, had still not caught up to their 1990 levels of output. Many Sub-Saharan African's economies failed to take off during the 1990s, in spite of efforts at policy reform, changes in the political and external environments, and continued heavy influx of foreign aid. Uganda, Tanzania, and Mozambique were among countries that showed some success, but they remained fragile. There were several successive and painful financial crises in Latin America, East Asia, Russia, and Turkey. The Latin American recovery in the first half of the 1990s was interrupted by crises later in the decade. There was less growth in per capita GDP in Latin America than in the period 1950-80. Argentina, described by some as "the poster boy of the Latin American economic revolution" came crashing down in 2002.

Many critics of trade liberalization see the Washington Consensus as a way to open the labour market of underdeveloped economies to exploitation by companies from more developed economies.

Further, many of the policy prescriptions (e.g., the privatization of state industries, tax reform, and deregulation) are criticized as mechanisms for ensuring the development of small, wealthy, indigenous elite in the Third World who will rise to political power and also have a vested interest in maintaining the local status quo of labour exploitation.

Some specific factual premises of the critique as phrased above (especially on the macroeconomic side) are not accepted by defenders, or indeed all critics, of the Washington Consensus. To take a few examples, inflation in many developing countries is now at its lowest levels for many decades. Workers in factories created by foreign investment are found typically to receive higher wages and better working conditions than are standard in their own countries' domestically-owned workplaces. Economic growth in much of Latin America in the last few years has been at historically high rates, and debt levels, relative to the size of these economies, are on average significantly lower than they were several years ago.

Despite these macroeconomic advances, poverty and inequality remain at high levels in Latin America. About one of every three people - 165 million in total- still live on less than $2 a day. Roughly a third of the population has no access to electricity or basic sanitation, and an estimated 10 million children suffer from malnutrition.

Seeing these unfavourable developments, the World Bank’s new emphasis is on the need for humility, for policy diversity, for selective and modest reforms, and for experimentation.

V. INSTITUTIONALISM IN INDIA:

Institutionalism advocates removing the colossal deprivation that exists in the country (like India) to make it a “less unjust” society.

Globalization today is not working for many in the world. Globalization is not helping the poor people thus increasing social inequality. It must be understood that the problem is not with Globalization but with how it is managed. Part of the problem lies with the international economic institutions, with the IMF, World Bank and WTO, which basically hold the strings. They often serve the interests of advanced industrialized countries rather than those of the developing countries. Globalization has to be reshaped, reformed to allow it to realize its true potential. This requires stronger International Public Institutions which focus on issues of collective action, transparency in decision making, and finally general reform. This concern has given rise to interest in "global governance". It implies that states alone cannot manage global affairs, and therefore it accords roles to international governmental organizations (IGOs), non-governmental organizations (NGO’s) and multinational corporations (MNC’s). It covers many issues, such as women’s rights, human rights, development, democratization, the environment, security and investments. Its recent achievements include the treaty banning landmines, the Kyoto climate convention, the international criminal court, the World Trade Organization, and the ‘new generation’ UN peacekeeping operations. In this way steps are taken by governments throughout the world to remove the highly spread social and financial imbalance in the different economies.

Government is the formulator of economic policies that determines the environment in which the private sector operates. Hence government efficiency is the key to economic development. This brings to the fore the issues of political and bureaucratic corruption, political stability and transparency and accountability of the administration. Bureaucratic inefficiency as a result of corruption affects growth. Corruption leads to low growth and low incomes resulting in a higher propensity to be corrupt.

In India there is rampant corruption, social inequality (like caste system) and other social malpractices like Dowry, Child Marriage, Child Labour, Untouchability, child malnourishment, inaccessibility of basic medical facilities, and continued gender inequality.

India is being called a ‘Nominal Democracy’ because people are voting just for namesake. They do not know concrete facts about the candidate and hence do not use their voting rights to full potential.

Government helps in poverty alleviation through channels like Transfer of income from the upper and middle-income classes to the poor, by contributing towards economic growth and by providing cheap public services and food subsidies to the poor.

To remove inequalities and unjust social practices government implements policies for anti-corruption, public expenditure management, special reservations for the backward classes, special schemes like NREGS etc for the upliftment of the poor people.

People put their interests above the general interest of the organisation for which they are working and indulge in malpractices. For example forest department. It harasses the tribal people on the pretext that they are stealing wood and cutting trees for their livelihood while allowing the timber merchants to go scot free. Instead they should take help from these tribal people who know the forests inside out for nabbing the real culprits.

One more example from present day politics is that of Reddy brothers of Karnataka.

• The brothers have been redrawing inter-state boundaries to encroach upon other mines and forest land in Karnataka
• The Reddy’s operate out of AP where they are connected to the CM’s family
• The Union environment ministry and the Karnataka Lokayukta are aware of the activities of the brothers

The Reddy brothers with their influential connections in the congress high command have rendered the Karnataka chief minister B.S.Yeddyurappa powerless.

This again goes to show how ineffective governance and selfish interests leads to exploitation of resources (iron ore in this case) and only a few individuals (Reddy brothers in this case) derive the benefit from them.

VI. CONCLUSION:

Thus Veblens’s evolutionary approach to the study of economic systems is once again in vogue and his model of recurring conflict between the existing order and new ways can be of great value in understanding the new global economy.

The New Institutionalism which deals with the influence on human behaviour stresses that particular institutions and their organizational instantiations are deeply embedded in cultural, social, and political environments and that particular structures and practices are often reflections of and as well as responses to rules, laws, conventions, paradigms built into the wider environment.

The policy reforms brought by Washington Consensus helped to improve much of Latin America, but it was in most countries less than the reformers had originally hoped for and so many critics of trade liberalization see the Washington Consensus as a way to open the labour market of underdeveloped economies to exploitation by companies from more developed economies.

In India, Government, which is the key formulator for economic developments, should not consider people as name sake for voting alone. Rather it should remove the issues of political and bureaucratic corruption, bring in the political stability and incorporate the transparency and accountability in the administration.