1
Precis of
Comparative ins titution al analysis in large
economic systems: usefulness, app lication , and
limits
Pubished in Istituzioni e Sviluppo Economico - Institutions and Economic
Development, vol.2 (1) pp.32-68.
Stefano Solari
Department of Economics, University of Padua
Via del Santo, 33
35123 Padova, ITALY
[email protected]
Abstract
This paper proposes some reflections on comparative institutional analysis (CIA) and, specifically,
on the use of this instrument in analysis of the relationship between institutional configuration of
economic systems and their performance. We will firstly outline the debated problem of the desirable
modifications of institutional set-ups in different countries. We will argue that the variety of
capitalism view represents the most reasonable hypothesis of study when considering the many
interactions among technologies, assets and institutions. CIA is supposed to provide tools to achieve
some solid statements even in a situation of a plurality of optimal arrangements. We will compare the
different theoretical standings of some CIA approaches in economics and socio-economics, showing
the main converging principles to frame the study of institutional configurations: complementarity
of institutions and viability of arrangements. These principles may also serve to structure the
framework of analysis to reduce the indeterminacy of this kind of analysis.
Keywords: comparative institutional analysis, institutional change, institutional
complementarity, functional analysis, models of capitalism
JEL classification: B40 E61 P51
1.
The
pr o ble ms
ra ise d
by
the
c hang e
in
western
ins tit ut io nal
configurat ions
The role of institutional arrangements in the performance of economic systems is a theme
which is increasingly attracting the attention of economists. After the Second World War,
most industrialised countries adopted institutions that gave priority to financial stability and
1
redistribution . The common bundle of institutional arrangements was the Bretton Wood
international financial regime characterised by fixed exchange rates and restricted mobility of
capital. In this framework the most liquid resource was put under control and each economic
system was free to design its internal institutional set-up with a certain autonomy. In fact,
many countries put the institutions of the welfare state at the top of their priorities, which
were eventually enlarged and made more consistent by centre-left governments in the 70s.
1
This compromise was explicitly theorised by both Keynesians and Social Market Economists
(Koslowski, 1998a).
2
After the change of international financial regime, the fall of the socialist block and the
globalization of markets, the difficulties of keeping autonomous institutions to obtain
redistributive effects emerged. European countries were able to partially offset the problems
2
for 20 years thanks to their monetary system . The increased openness and connection of
economies and the pressures of strong interests connected with financial markets succeeded in
eliminating most of the obstacles to capital flows, consequently most of the mixed-economy
models of capitalism were put under strain. Moreover, the prevailing technology also changed
and small and medium-sized firms gained strong political power due to their increasing
economic importance. The latter displayed a total discomfort with the institutions regulating
employment and social security, which were designed to fit oligopolistic systems. As a
consequence, the institutional configurations of many countries currently appear unfit for the
new international situation and strong political influence is exercised by many economic
interests to change the institutional “relics” which gave rise to the “Fordist” models of
capitalism. Finally, the integration of Europe required some rules which have considerably
reduced state intervention in the economy, which was one of the pillars of the Italian and
French institutional arrangements. The result is a general perceived need for institutional
reforms but without a wide consensus on a definite direction, increasing economic
uncertainty.
Among economists, the prevailing opinion is that the institutional configurations of
countries cannot avoid converging towards a liberal finance-led (U.S. kind of) system.
However, a consistent group of scholars, expressed in the literature on the different forms of
3
capitalism , affirms that convergence is neither necessary nor useful. They argue that there is a
rationale for maintaining autonomous institutional arrangements, providing different forms of
risk sharing, different distribution of income and investment opportunities resulting in some
4
comparative advantages in international specialisation .
In both cases economists face the fundamental problem of finding some criteria to evaluate
the economic role of institutions, predicting effects of institutional change. The main
theoretical issue of this practical problem is how to assess the role of institutional set-ups in
the (differently conceived) economic outcomes of a country. A consequent point concerns
the measurability of the impact on the economic system of a change in the rules of the game.
A field of study is now becoming consolidated under the label of Comparative Institutional
Analysis (CIA) which aims at providing some answers to these questions. However, it remains
difficult to draw up solid statements on this subject. The production of solid evidence and of
2
3
The supply shocks of the 70s confused the situation and delayed perception of the issue.
See, among the more recent publications, Amable (2003), Hall and Soskice (2001), Whitley (2000).
3
some appropriate analytical tools to sort comparative statements is therefore fundamental in
order to obtain scientific knowledge to help policy-making avoid the "nirvana fallacy" of
5
comparing existing set-ups with ideal ones , which often characterises debates on these issues.
It may be objected that studies in the field of economic institutions are probably still not
ready to provide clear and indisputable insights into such complex problems. However, the
aim of this paper is to illustrate some progress made in this field by CIA. The aim is, first of
all, to explore the principles used to organise the evidence concerning institutional
configurations and the connections among institutions. Then the issue becomes how to
establish a point of reference to make some judgement on the fitness of institutions and
institutional change (decided in the polity) without a single, general, although abstract,
reference point.
2.
Co m parat ive Inst it ut iona l Ana lysis: econ o mis ts ch asing aft er soc io econo m ics
Comparative institutional analysis (CIA) is a field of study which aims at developing new
scientific knowledge in the complex topic of the structural differences of economic systems
and their performance. According to Stefan Voigt (1999a p. 52) CIA «asks how alternative
institutional arrangements affect (economic) outcomes». There are a number of approaches in
economics which refer to CIA. First of all, it is a constituent part of New institutional
6
economics (NIE). The studies of Law and economics and of Economic organization began to
consider the possible increase in efficiency obtainable by a change in property rights or, in
general, by a modification of contractual schemes. As a consequence, NIE shifted its concern
from the simple allocative efficiency to the study of how legal and social constraints affect
economic performance. Williamson (1985) explicitly introduced the label CIA in the study of
7
alternative governance structures and based it on transaction costs (TC) . North shifted this
approach to the study of long-run institutional change. In this way CIA was applied to wider
economic systems where the institutional setting is complex and some models of state8
economy interaction are needed to explain institutional change . The work of North therefore
contributed to a macroeconomic extension of CIA and to a less specific use of the notion of
4
An intermediate view exists, expressed by Freeman (2000), which conceives an optimal model, declined
according to a plurality of arrangements due to the costs implied by convergence with the optimal
institutions. The latter can be seen as a weak form of the single optimal configuration view.
5
Cf. Demsetz, (1969).
6
See Demsetz (1964); Alchian et al. (1972).
7
Eggertsson (1990), however, has explicitly recognised Transaction Costs Economics (TCE) as an
extension of neo-classical economics. See also Klaes (2000) for a methodological evaluation in
Lakatosian terms.
8
In North (1981) the polity is the source of institutional change.
4
TCs. Frey, Pommerhene and other Swiss scholars introduced the macroeconomic approach to
CIA in public finance and constitutional comparisons in order to show the relationship
between constitutional settings and public expenditure (and taxation). Voigt (1999a) has
recently further extended the CIA approach to Constitutional economics in a way which is
closer to North’s.
On the other hand, Aoki’s CIA (1996), which was developed from the study of firms’
arrangements and subsequently extended to wider economic systems, is not based on TCs.
Aoki introduced (and refined) game theoretic explanations of institutions, taken from the
multiple equilibria view of economic organisation, to study the interconnections among
institutions. However, going backwards in the history of economic thinking, at the roots of
CIA lies the literature on comparative systems, which owes much to the German historical
school and to Ordoliberalism (Schefold, 1995). This kind of theorisation, together with Social
9
market economy, is interesting for institutional comparison because of the concept of the
“totality of the economic order” and of some methodological intuition given by the need to
10
reconcile the legacy of the German historical school with synchronic theorising .
Finally, nowadays, it is increasingly fashionable to include institutional factors in growth
models to produce cross-country studies which aim at establishing some regularities in the
11
association between the existence of a certain institution and economic growth . This is
particularly frequent in labour economics where bargaining institutions and employment
12
protection regimes are often contrasted in relation to economic growth . This approach can
achieve good results when the compared systems are not very different as in the case of Swiss
13
Cantons in Feld and Savioz (1997) . In this context, we can assume that the similarity of
context is higher than in comparisons between countries,
14
however, it is in the latter case that
a CIA is more relevant for decisions concerning institutional change.
Looking at the literature in applied economics, which can be defined as CIA, we realise
that most of it has been produced by economic sociologists or by economists who consider
15
economy and society as a unitary domain of study . In fact, a number of theoretical
frameworks and an interesting amount of empirical evidence have been organised according to
9
See Koslowski (1998b).
See Labrousse and Weisz (2001).
11
This strategy is able to point out similarities but not to understand the role of differences, or explain
the logic of internal coordination of institutional configurations.
12
Calmfors and Driffil (1988) is the milestone in these studies. See Freeman (2000) for a review of the
literature.
13
The authors have found good results in the association of direct democracy and economic
performance in a study on Swiss cantons.
14
We can assume similar preferences, the same constitutions, a similar territory, the same history, the
same development phase, etc.
15
Of the many socio-economic approaches, we devote particular attention to the French Régulation
school which will be presented later on.
10
5
such approaches. We can include in this category studies on the different forms of capitalist
economies, comparative employment institutions, the comparison of welfare states, the
theories on national systems of innovation, the studies on the state’s role in the economy, the
study of regional political institutions, etc..
3. The ro le of inst it ut ions in ev olving eco no mie s
The prominence of socio-economics in producing evidence on the role of institutions in
economic processes is due to the difficulties of economics in expanding the application of its
method to issues broader than the simple allocation of resources. The inclusion
(endogenization) of exogenous elements as institutions in the framework of analysis raises
some problems which go beyond simple efficiency. In fact, rules represent ethical aspects in
themselves which cannot be compensated by increases in wealth or, in any case, are difficult to
evaluate. As a consequence, this type of analysis cannot be unravelled without the
introduction of further hypothesis. The way we consider institutions is therefore important in
order to study the effects of their modification. We can single out two main conceptions of
institutions:
a)
institutions as exogenous elements representing bounds to human choices, which
restrict the field of the pre-determined set of outcomes;
b) institutions as rules of the game, transcending economic choices but at the same time
defining available options.
In the former case institutional modification is relatively neutral to outcomes and is
defined according to the desirability of results, as in standard Law and economics. In the latter
case, institutions display a foundational role in economic interaction because they define
property rights on resources, the rules of interaction and also acceptable coordination forms.
When studying large economic systems, the latter conception is more relevant. Of course, the
modification of economic institutions may be the result of ethical views of society as well as
of compliance interests. Eggertsson (1998b, p. 9) affirms, that «institutional policy, therefore,
depends not only on the balance of various interests but also on the outcome of the
competition between alternative models and ideas about social processes». As a consequence a
community may display some high reservation price on the change of some rule because of
ethical objectives. However, what in fact determines institutional change is the complex
interplay of political and economic interests.
There is a further issue regarding the way institutions are conceived to affect choices which
is relevant in the study of their change. It regards the relationships arising between
institutions. In fact, institutions may be conceived:
i)
as an additive set of separable units (rules);
6
ii)
as a system of rules with particular relationships intercurring between them which
affect their coordination effect on choices.
In the former case institutional change may be operated separately on single rules, directly
determining positive or negative effects on economic outcomes. In the latter case, the
situation is more complex because also the relationships between rules affect the coordination effect. In this situation the coherence of the whole order becomes important to
determine the effect of changes. In general, in this latter case, there is no chance of Paretian
improvements, but changes can be made only finding discrete sets of institutional
configurations. Moreover, if some rules are rigidly determined because of political-ethical
values, this also affects the choice of institutions complementing the general order. Some
theoretical research is in progress to formulate justification of the latter hypothesis by the
concept of “multiple equilibria” derived from evolutionary game theory and from the principle
of complementarity and supermodularity (Hall and Soskice, 2001; Aoki, 2001; Amable 2003;
Pagano, 2002; Topkis, 1998).
4. Instit ut io nal c o mparis on: the r isk of in deter m inac y
The problems illustrated above complicate the study of the relative efficiency of rules.
Comparing the role of different institutions, application of the same method used for normal
economic choices – comparative statics – produces weaker results (Eggertsson, 1997; 1998a).
This is due to stronger ceteris paribus hypotheses needed to take into account part of the
elements normally excluded from the standard analysis (institutions). When dealing with large
economic systems we face the double problem of coordination and efficiency (institutional
arrangements in fact are strictly connected with the concept of coordination). On the one
hand, microeconomic efficiency consists in the best allocation of resources within a given
opportunity set – the latter being also determined by institutional factors – and in relation to a
defined aim. On the other hand, different forms of coordination result in different
16
opportunity sets for efficient choices . If institutional configurations are important elements
determining the form of coordination, then we can consider that institutional change does not
simply affect opportunity costs, but also the range of opportunities. Therefore, the change in
the rules of the game is a rather different issue compared to that of a change in other
economic resources. This is an important issue and, in fact, Kirzner (1998) proposes the same
coordination as an objective criterion of economic "goodness" abandoning the reference to
16
Institutional change leads first to a change in coordination forms and only at a second stage can we
redefine the efficiency problem.
7
17
efficiency .
Moreover, the co-ordination form is not the only determinant of opportunity sets for
economic choices. Other variables such as the distribution of property rights on resources and
technology are equally important. Furthermore, some differences in the preferences of actors
belonging to different systems may produce, ceteris paribus, different choices which should be
differently coordinated. If a change of rules will surely modify the opportunity set of agents, it
may also change their strategic behaviour. In fact, preferences concerning choices affecting
stock variables and technologies are relative to coordination contexts. This fact implies that in
order to evaluate the effects of a change in coordination, we must alternatively assume a
general ceteris paribus hypothesis on resources, technology and actors’ preferences or assume
exogenously that actors change their strategies according to institutional change. In the
former case, the logic is to assume efficient choices made within the opportunity sets defined
by different coordination forms and to compare the latter to establish which is producing best
results according to a common principle of judgement. The result is that we would be able to
say that a given set of rules provides a best opportunity to increase welfare given a set of
agents with some known and invariant preferences, resources and technologies. This approach
is best suited to limited contexts where single contractual arrangements may be conceived as
18
instrumental . Such instrumentalism may be adopted also at the macroeconomic level for
minor legal changes, but results are a good deal more uncertain (Eggertsson, 1997; 1998a).
Moreover, it would be disputable and perhaps also contradictory to change some structural
factors such as institutions (with large sunk costs) according to short-term preferences. It is
more appropriate to think that institutional set-ups evolve in the same time dimension (and
presumably co-evolve) with the results of strategic behaviour of the main interests at stake,
19
that is to say, with the dynamics of technology and investment patterns . A further aspect is
that institutional change implies some cost. As Freeman (2000) argues, if there are costs for
modifying institutions, more than one equilibrium would be optimal at the same time.
Therefore, comparative statics comparison may be a reasonable framework for applied studies
in specific economic contexts but, given the very restrictive hypotheses and the unreachable
information required by researchers, it should be used carefully in large systems and for
substantial reforms where relationships between institutions acquire relevance.
Notwithstanding these difficulties, the applied study of institutional configurations of
different countries can provide much information on the available options to improve the
17
Being an Austrian economist he believes in the efficacy of economic processes in achieving the best
solution.
18
At the firm level we can treat the form of coordination as an instrumental variable (ceteris paribus) but
it is more difficult to make such an assumption for an economic system.
8
coordination of economic processes. This has the advantage of avoiding the so-called "nirvana
fallacy" of comparing existing institutions with ideal arrangements. Some conscious and wellpondered approximation has to be introduced and some criterion and technique of
comparison should be adopted. The solutions vary considerably between the different schools
of thought.
Constitutional economics, which is strictly influenced by New institutional economics, has
theorised CIA as a valuable instrument to measure economic outcomes. Voigt (1999b p. 7)
pointed out two conditions in which the effect in rule change can be estimated:
1 - the existence of a commonly agreed measuring rod to compare two situations in
relation to their outcomes;
2 - a reliable hypothesis of the form ‘institutional change of type X will lead to an
20
improvement in social welfare of amount Y’ should be available .
New institutional economics grounds its hypothesis concerning "welfare gains" considering
the change of transaction costs (TCs), which are a metric variable negatively correlated with
efficiency and which do not present the disadvantage of mixing qualitative and quantitative
variables. However, this kind of comparison implies other seldom explicated hypotheses: i) a
"measuring rod of the measuring rod" (TCs) should be assumed, otherwise, if an ideal
transaction situation (a market with zero TCs) is assumed as a reference to measure existing
21
TCs, the “nirvana fallacy” re-emerges ; ii) no complementarity between institutions exists
22
23
(additivity) ; iii) TCs are imputable to chosen institutions ; iv) preferences are assumed as
given (in time and space) and the change of institutions would not modify them, which
determines a total disconnection between choices and regularities of behaviour; in any case, v)
only a marginal modification can be taken into consideration when estimating a welfare effect.
The recourse to empirical associations of TC with empirical features of organisations – such as
investment specificity, the frequency, the complexity and the degree of interconnectedness of
19
We can therefore affirm that there are choices within the rule set and choices of the rules (Vanberg,
1994), but we must be careful that the two kinds of preferences are not mixed because their interaction
does not occur in a timeless space. The sequence order is important.
20
Two more hypotheses are made concerning the fact that there are actors capable of bringing about
such an institutional change and their willingness to do so, but they are not of interest here.
21
The first point is important since the point of reference adopted in the evaluation of TC in large
systems is not clear. It seems to be important to establish how to measure the change in transaction
costs. Many factors are not expressed in monetary terms and their evaluation presupposes some
reference point, which may be assumed to be a perfect market interaction, but in this case a selfreferential reasoning emerges. Many factors influencing efficiency of exchanges are anyway not easy to
measure, e.g. information asymmetries.
22
The second point concerns the linear additivity of the effects of institutions. If some complementarity
among institutions exists, a multiple equilibria situation may emerge which makes welfare effects
uncertain (Pagano, 2002; Aoki, 2001).
23
Many forms of uncertainty affect exchanges, which are implicit or latent. The use of TC as a
measuring rod to perform CIA works well when governance structures include all the factors influencing
TC. If this assumption does not hold, a complex problem of isolation arises playing a major role in the
evaluation of governance structures.
9
transactions
24
– is precisely studied for micro contexts but becomes rather metaphorical in
wider systems. The result is that although TCs are seldom observable in large systems, the TC
approach remains a pillar of New institutional economics and in certain cases a useful and
concise tool in evolutionary studies, in particular the Evolutionary new institutional economics
25
of historians such as North and Eggertsson .
If we abandon the TC as a measuring rod, the choice is left to an approach based on strong
empirical evidence concerning connections between institutional configurations and general
economic outcomes (growth, distribution of income, unemployment…). A serious problem
of isolation of the significant object of study from the context still remains important because
of the necessary choice of the institutions which matter. Institutions include many
heterogeneous factors and are closely interlinked so that disentangling the bundle is always a
difficult operation of abstraction. In order to overcome these shortcomings linked to the
impossibility of good ceteris paribus conditions in applied economics, comparisons should be
made in more precise terms and in an encompassing perspective in order to reduce
uncontrollable exogenous factors. Voigt (1999a p. 53) suggests at least three types of
reasonable comparison to overcome such problems:
1 – a comparison of institutional arrangements that are made simultaneously at one particular
point in time (by relying on the work of economic historians);
2 – a comparison of identical institutional arrangements that have led to different outcomes;
3 – a comparison of different institutional arrangements in a single society at different points
in time.
Such comparisons often take institutions as qualitative variables and economic growth as a
26
metric variable . Cross section regressions are currently used as an alternative source of
comparison. Their aim is that of finding a correlation between growth and the existence of
certain institutions. They may provide some robust facts about the association of institutions
and performance. Taken as it is, this type of study makes an implicit hypothesis concerning
the additive relationship between institutions, and therefore it presumes the existence of a
24
See Masten et al. (1992). TCs are commonly divided into coordination costs and incentivation costs,
the latter further divided into costs due to information asymmetry and to imperfect commitment.
25
Eggertsson has distinguished two categories of NIE which differ in some basic assumptions and lead
to different applications of CIA. We can subdivide NIE into a static institutional theory and a dynamic
institutional theory. The former is «a relatively homogeneous approach which assumes stable preferences,
maximization rationality, and equilibrium; or alternatively relies on functionalism with ‘as if’ maximization
or bounded rationality» (Eggertsson, 1999 p.11). He adds in a footnote that ‘as if’ maximisation is used to
avoid explaining individual decisions and collective choices. The dynamic theory «consists of a portfolio of
approaches that explicitly model social learning and knowledge and employ various cognitive approaches and
models of rule governed (procedural) rationality" (Eggertsson, 1999 p. 11).
26
The use of GDP as the metric variable is obviously considered to significantly reduce the
incomparability of comparison, however, some structural differences in values among countries persist
even in industrialised economies. TCs are probably less distorting as a measuring rod, but the difficulty
of measurement makes them unpractical.
10
single optimal configuration. This kind of technique would have been more robust if
institutions directly affected growth without any coordination effect. In fact, this kind of
study is generally unable to provide clear evidence. Freeman, for example, found that, in
general, the literature on labour economics did not find that institutions have an important
effect on growth, even though some evidence of their effect on redistribution and equality
exists. Actually, cross section analysis does not perfectly belong to the category of
comparative techniques since it shows only similarities and does not provide information on
the role of differences. The way to overcome this problem is to use it as a step in the
comparative process or to fit it in a more sophisticated process also using qualitative
analysis.
27
Qualitative comparative analysis (QCA)
28
is a research technique based on logic which can
be useful for CIA to single out evidence of some relationship between institutions and some
economic indicator (performance, stability, risk distribution). It explains events by
contrasting existing configurations of variables (institutions) and cases when the event has
been produced or not. QCA especially helps to single out events produced by a combination
of different causal factors and events which may be determined by a plurality of
configurations of causes. Both causes and events are expressed in binary terms in a Boolean
matrix. Obviously, in the case of institutions, a preliminary taxonomy of the relevant
institutions to be assessed has to be assumed and a criterion for discriminating between
relevant and irrelevant institutions should be developed. The comparison of cases then adopts
the logic of the comparative method per genus et differentiam illustrated by J. S. Mill in A
System of Logic (1884) and more sophisticated algorithms for treating large data matrixes. This
approach provides fairly robust results (in relation to statistical techniques) but it could be
misleading in the case of too narrow a number of variables (institutions considered). In the
case of too large a number of variables it can lead to an irreducibility of data to significant
theorisation because the geometrical increase of the matrix dimension is 2k, where k is the
number of institutions considered. As a consequence, the taxonomy to classify institutions is
a crucial part of CIA based on QCA. Boyer (2001) exploited this technique to demonstrate
that the institutional set-up best fitting the "new economy" is not necessarily that of the U.S.,
the growth of these sectors being higher in Scandinavian countries (with large welfare states).
Another deficit of QCA is that it does not directly provide evidence on relationships between
institutions. For this purpose cluster analysis is used to highlight some complementary effects
between institutions (Amable, 2003).
5. Case -or iente d st udies an d t he fram ework f or CIA
27
28
See Solari (2004a).
See Ragin, (1987); (1994).
11
A large amount of evidence on the role of institutional configuration on economic
processes has been provided by socio-economics and in particular by the followers of
29
Schonfield (1965) . This approach is based on a rationale against a “best-performance”
30
oriented comparison .
a) No institution can be understood in isolation from the context as a whole. The general
institutional configuration “defines” the role of the single institution.
b) Different countries presuppose differences at least in certain kinds of preferences (which
are culturally determined)
31
and also in the criteria of evaluation of outcomes, which
cannot be easily compared.
c) Causes rarely operate in a simple additive fashion as in statistics. Rather, they combine
and intersect to produce changes. Moreover, different combinations of causes may
produce the same outcome (this fact is mastered by QCA).
d) Different economic systems may be in the development process at different time phases.
Therefore the same institutions may be playing different roles.
In order to avoid such problems of incomparability many researchers have preferred to
concentrate on accurate case studies to analyse the many interconnections among institutions
which define economic systems. Extensive literature has been developed, now known under
the label “variety of capitalism”. Of the many systems existing, the German, the Scandinavian
and the French models have been the most studied since they present the most typical
32
features .
This approach has some evident advantages since it provides some very good quality
information, an articulated structuring of institutions, a good description of the interests at
stake and of the actors that carry political demand. Moreover, it has contributed to connecting
economic interests, institutional configurations and policies consisting also in processes of
reform. Many linkages, interdependencies and synergies have been highlighted which give
some depth to economic analysis.
On the other hand, this approach presents some shortcomings. Firstly, it is difficult to
demonstrate the relative importance of institutions in the working of economic systems if we
do not compare different systems. The evaluation of feasible alternative arrangements, which
may provide best outcomes, is not possible. Therefore, a “viability” perspective on
institutional configurations can be provided, based mainly on conflict control and synergy of
Cf. Hollingsworth et al. (1994); Kitschelt et al. (1999); Soskice (1999).
Some of these arguments are taken from comparative statistics debates, see Ragin (1994).
31
In particular, relational assets may play a basic difference. Let’s consider the resistance of family
structure in Mediterranean countries compared to the higher atomisation of individuals in Northern
Europe.
32
See Streeck and Crouch (ed.s)(1996).
29
30
12
33
interests, but it is difficult to provide any quantitative economic judgement beyond that .
Lastly and marginally, results are considered not completely consistent by social scientists
used to formalised theorisation and econometric tests, and therefore a problem of scientific
communicability exists.
Case studies may extend their scientific role showing the complementarities and the
contribution of single institutions to the coherence of the whole configuration by the
adoption of CIA. The latter may systematically single out similarities and differences of
institutional arrangements in relation to their performance. The evidence of recurrent clusters
of institutions assumes special importance since it provides arguments against the “additive”
view of institutions and for the variety of capitalism which consists of a given number of
viable forms. In fact, the large number of elements may weaken the power of comparison. The
crucial problem is to find the right compromise between detail and operationality of the given
representation of the economic system. On the one hand, excess simplification of the
institutional arrangement may lead to strong results in the comparison, but it affects the
accuracy of the evaluation of single special institutions. In this case the risk is that of
underestimating the opportunities for change and for achieving new synergies and
complementarities. On the other hand, with excess detail there is the risk of losing the help of
comparison to fix the performance of certain arrangements.
In order to focus on the problems involved in the evaluation of institutional change, the
problem of comparison may be subdivided into two parts:
1 - the comparison technique;
2 - the framework in which the economic system is theorised, that is to say, the framework
used to order institutions, their relationships and their interactions with other economic
variables.
As we have already seen, the comparison per genus et differentiam still remains the basic
logic used to develop strong evidence. On the other hand, the macroscopic framework
representing economic systems to be compared has not found a stable conception. Since
institutions are a way of reintroducing a part of the context in economic reasoning, the
categories used to model them acquire special importance. There are many taxonomies to help
detect relevant institutions. The best suited to our aims are those which provide a general
structuring of the whole system. Given the importance of complementarity of institutions for
comparison, the classification is as crucial as the correct clustering of single items. A review of
the main studies which have considered similar problems provides the idea that there are two
basic principles used to connect the general order: micro-based concept of complementarity
and the more macroscopic principle of "coherence" or "viability".
33
The viability of the German or French models has often been declared in danger when some
institutional change has taken place. At present, they are not in good health but still working.
13
6. The diffe rent t heoret ica l fra mewo rks of instit ut ion al co m par iso n
The first frameworks for systematic institutional comparison were probably laid down by
the German historical school, however, the concept of “economic style” as well as that of
“economic order” or “Gesamtordnung” did not meet with great success in economics mainly
because of the marginality role of economic problems and the idiographic method used. From
the epistemological point of view, the contribution of structuralism in anthropology to
34
institutional comparison should be mentioned because it affected many economic studies .
Lévi-Strauss (1958 p. 98) affirmed that structuralism is a method that permits demonstration
of how we can discover some differently declined invariant properties behind the
heterogeneous appearance of empirical elements. Therefore, this method of generalisation
consists of going up to the level of abstraction where « the incomparable becomes
comparable», where the objects to be compared are built in such a way that only a single
general theory exists, which, by fixing what is common, allows differences to be established at
the same time (Théret, 1997 p.197). Institutional arrangements (behaviour regularities) can be
considered such an abstract framework. The theory of Régulation represents an economic
evolution of structuralism, and it is one of the schools of thought which more intensively
adopted CIA. According to Théret, the three main principles of the comparative approach of
the Régulation School are:
1) The comparison concerns relations and systems of relations and not system elements;
2) The necessity of comparing systems at a higher level of abstraction which allows the
emergence of common structures and differences, avoiding surface comparisons;
3) The need to compare historical developments of structures as well as their synchronic
coherence.
We add that the Régulation framework has the advantage of completeness, that is to say it
concerns the whole socio-economic system and therefore it eliminates most of the dangers of
overlooking third variables, any elements that may have a crucial role. This theory is based on
the concepts of accumulation regime and regulation mode, both of which lie at a level of
abstraction, which allows for comparisons of capitalist economies. In particular, the régulation
mode is the whole of the procedures, including single and collective behaviour, which allow:
reproduction of fundamental social relations; sustaining and driving of the accumulation;
ensuring of the dynamical compatibility of many dispersed decisions. It is normally
subdivided into five institutional forms: money and finance, competition and industrial
34
Unfortunately, the most widespread structuralism in economics is that of industry studies which sees
economic performance as determined by the industrial structure, which is a poor application of
structuralism.
14
organization, labour and welfare, state form and intervention, international relations. It
includes the generality of institutional forms, which is the backbone of the economy. On the
other hand, the elements of the accumulation regime connect institutions to economic growth
processes and to stock variables. As a consequence, the Régulation approach is a
macroeconomic approach which provides a full taxonomy of institutions and connects them
to economic growth through the concept of "coherence" assuring the best economic
coordination.
35
The unity of the system to be compared is the national economy.
The problem of comparability becomes more complex when dealing with nonmacroeconomic systems, that is to say, when the unity of the economic system is not assured
by political boundaries. In this case two helpful theoretical perspectives have been expressed
thanks to system thinking (Herbert Simon) and microeconomic subjective game theory
(Masaiko Aoki).
Simon (1978) exposed a theoretical grounding of CIA connecting institutions to system
thinking. His main idea, the functional analysis of institutions, has been taken as a point of
reference for CIA by many authors, but never well expanded in detail and, above all, never
developed in its original spirit.
36
In Simon’s opinion institutions do not necessarily assure, in
an evolutionary process, the coherence of the general economic system. However, "functional
analysis" can aid the study of their role in the functioning of the entire system. The term
functional means that every part has a role in the working of the whole, which is expected to
37
achieve some goals for the actors composing it . According to Simon (1978 p. 3), functional
analysis is concerned with explaining how «major social patterns operate to maintain the
integration or adaptation of the larger system».
38
Consequently, in line with his organizational
approach, he introduced a teleological dimension in order to explain system integration. This
dimension is strictly connected to social goals. The introduction of a functional perspective
does not necessarily lead to "functionalism" and to a teleological explanation (in the sense of
end-determined actions). The part is not explained by the whole, it simply has a role in its
evolution and in the coherence and viability of its evolution. Individual actors have some
(conflicting) preferences concerning its arrangement, but viable institutional compromises are
politically reached. In fact, the perspective proposed consists of an open-ended evolution given
See Herrmann-Pillath (2001).
First of all by Williamson who, it should be remembered, was Simon's student.
37
Wimsatt (1997 p. 103) has pointed out three meanings for the concept of function in biology:
➀ To say that an entity is functional is to say that its presence contributes to the self-regulation of some
entity of which it is part (…);
➁ To say that an entity is functional is to say that under at least some conditions it plays a (presumably
causal) role in the operation of some system of which it is part (…);
➂ To say that an entity is functional is to say that it is being selected for or maintained by natural
selection (…).
38
«Institutions are functional if reasonable men might create and maintain them in order to meet social
needs or achieve social goals.» (Simon, 1978 p. 3)
35
36
15
39
by the search for a viable co-ordination which finds different forms of institutionalisation .
What is also interesting in Simon’s CIA is that the comparison of discrete forms is the
main tool of functional analysis. CIA is therefore seen as a means of exploring viable coordination forms and not of establishing welfare gains. This does not focus on how variables
are equated at the margin, or how equilibrium is altered by marginal shifts in conditions.
Rather, it focuses on qualitative and structural issues, typically, on the choice between a small
number of discrete institutional alternatives (Simon, 1978, p. 6).
There are two main implications of Simon’s research proposal which lead us back to the
points already discussed. The first, which was already illustrated by Hayek (1973), is that an
institution is only understandable in relation to the whole economic order and the
relationships between institutions are the most important aspect to be analysed. The
components of a system should be coherent with the whole, which is not simply given by
their aggregation but also by their relationships40.
Secondly, comparing discrete forms implies fixing some categories, some ‘ideal types’.
Therefore, a framework of analysis is needed which is not a theory but an explicit criterion for
ordering experience in discrete forms. We therefore distinguish between a theoretical activity
geared to making assertions to be tested and that of developing frameworks to fix categories, a
process which involves a procedural rationality on the part of the researcher (Delorme, 2001)
who aspires to obtain the intelligibility of the problem studied. The validity of theorising
therefore also consists in performing an effective separation between the object of study and
its context.
Further insights into CIA methodology can be found in the studies of Aoki (1996; 2001).
His approach adopts a more microeconomic approach combining «comparative information
across various economies with context-specific micro modeling based on recently developed game
theory, contract theory and information economics» (Aoki, 1996 p. 2). He suggests accumulating
context specific models in order to improve understanding of the functioning of institutions
(1996, p. 7). The accumulation of these specific models and the test of their predictive power
could improve our understanding of the inter-relatedness of institutions and economics in
41
general . On the one hand, the aim of accumulating context specific models makes Aoki
closer to single country study approaches, whereas on the other, he formulates a gametheoretic approach to institutional arrangements which is itself an abstract form capable of
39
Therefore we suppose that individuals act purposefully according to their interests and values to find a
viable coordination, the latter being the only way to achieve individual aims which can be met only by
collective action.
40 Hayek (1973 p. 36) "order" was inspired by the studies of St. Augustine and consequently there is an
indirect relationship with Aristotle's principles of final cause.
41
Aoki (1996, p. 3) distinguishes four main forms of links deriving from collective action on economic
interactions: markets and money; legal and political rulings by the state; contracts and (private order)
organisations; cultural beliefs and social norms.
16
setting comparisons between different contexts. His subjective game model is able to grasp the
aspects of interlinkages and interdependency of institutions. By introducing a distinction
between objective (a consequence function defined by institutions in other domains, laws,
technology, etc.) and subjective elements (preferences) in the payoff function he is able to
distinguish exogenous and endogenous rules of the game: he reconciles the (Northian) view
of institutions as “rules of the game” and the game theoretic view of institutions as
“equilibrium of a game”. Institutions are therefore seen as some self-sustained system of
shared beliefs about how the game is played, leaving open opportunities for endogenous
innovation.
42
Moreover, by introducing the “supermodularity” principle
43
he is able to frame
the main co-ordination problems involved in institutions. This game form, defined in various
domains, is a good device for analysing the interdependencies of institutions clustering in
various economies.
In Aoki (2001), an overall institutional arrangement is a synchronous set of institutions
across constituent domains in the economy, which are interdependent because of the
reciprocal definition of the payoff functions for the agents involved. Complementarity is
therefore the result of the coherence of actions across different institutions, given by the fact
that a consequence function in one domain is also determined by institutions in other
44
domains, law and technology . The interdependence between property rights, public
regulation, markets, organisations, contracts, cultural beliefs and social norms, combined with
the complementarity effect, leads Aoki’s CIA to a “multiple equilibria” view of economic
systems which in a certain sense acts as a micro-foundation of the diversity of capitalism
approach and which is much stronger than the view of Freeman (2000).
7. The str uct ur in g of co m paris on
The outlined CIA approaches show that there are two main recurring concepts in the logic
of institutional comparison, on which the framework of analysis may be anchored to reduce
theorising uncertainty: complementarity and viability. Complementarity is a microeconomic
principle studying preferential coupling of institutions and therefore concentrates on the basic
42
An institution is therefore defined as «a self-sustaining system of shared beliefs about how the game is
played. Its substance is a compressed representation of the salient, invariant features of an equilibrium
path, perceived by almost all the agents in the domain as relevant to their own strategic choices. As such
it governs the strategic interactions of the agents in a self-enforcing manner and in turn is reproduced by
their actual choices in a continually changing environment» (Aoki, 2001 p. 26).
43
Firstly developed by Topkis, then spread by Milgrom and Roberts. See Topkis (1998); Milgrom and
Roberts (1992).
44
Moreover, since contracts are always incomplete, ‘non-economic factors’ strongly influence the
functioning of transactions: «the effectiveness of contracts and organizations is supported by a fabric of
institutions which define outside options for organizational participants and constrain individual and
organizational behaviour» (Aoki, 1996 p. 6).
17
mechanisms of coordination between connected spheres of human action. Viability is a
macroscopic concept which may be best referred to sustainable socio-economic interaction
45
and therefore it deals with "conflict control" . Complementarity permits the study of how
discrete structures are built interconnecting basic components, while viability is a principle
which sets some constraints on the whole and permits evaluation of whether some functional
parts fit the entire arrangement well or not. Actually, these concepts tend to express from
different perspectives the coherence of the order (used by the Régulation and by the Hayekian
perspective); the former adopts a microeconomic approach while the latter is defined by
referring to a macro-social point of view.
We obtain different ways in which CIA can be structured according to the order in which
presuppositions concerning the kind of relationships founding the definition of the economic
system to be compared are assumed. Two different conceptions of CIA may be relevant to
our purpose:
1) An organic or “functional” comparison that takes viability as a precondition for the
structuring of the system and as a reference point in the evaluation of its internal
dynamics;
2) An organisational comparison of systems functioning which takes the complementarity
of institutions as the basic determinant of the compared units, assuming a basic set of
interacting institutions as the main object of study.
The former kind of CIA (1) assumes the boundaries of the object to be compared as given
and system integration (consistent order) is hypothesised as a fundamental constraint in its
dynamics. It presumes the existence of a unity of the institutional set-up, that is to say a
boundary can be drawn around the economy which is being analysed. This boundary is the
polity, because that is the arena where conflicts are reduced by institutionalization of
practices. The arrangement of institutional interconnections is on the contrary assumed as
something to be discovered since no coherent set of synergies is presumed or taken as a
standing point of the comparison. CIA represents a means of consolidating evidence of such
institutional arrangements by showing the different institutional sub-components of
economic orders. Different systems are evaluated in their ability to produce coordination and
avoid conflict, and no direct inference on performance is assumed. A co-evolution of
institutions and other economic variables, rather than a direct linear causality, is hypothesised.
This approach usually presumes a theory of the state or some insights into its role in
obtaining the evolutionary consistency of the economy. A reduction of complexity framework,
which may be a taxonomy or other ordering criteria concerning the institutional factors, is
adopted to permit the comparison. Institutional forms are detected in the whole economy.
45
Cf. Knight (1992). I have to thank Stefano Palombarini for discussing this issue with me and shedding
precious light on the many connected problems.
18
This does not preclude the study of hierarchies, complementarities and of the coherence of
the whole, which is achieved in a second step of the process. Those who study welfare states,
the role of the state in the economy, the many forms of neo-corporatism, prefer the former
46
kind of CIA (1) . The reason is that (generally) the state assures system boundaries,
integration and viability, therefore helping to reduce the indeterminacy of comparison. As an
example, the works of André and Delorme (1989) adopt the Régulation framework for
comparison; they then consider interests which shape institutions and indirectly influence
public expenditure. We can frame such co-evolution of interests, institutions and
“performance” variables as a process constrained by certain ends. The same strategy is that of
many studies in the comparison of welfare states where the state assures a general viability,
which is taken as a reference point for the evaluation of the evolution of variables.
The latter form of CIA (2) assumes the structuring of the system, that is to say the
organizational principles or the complementarity forms, as a criterion of system definition. In
this way, well integrated cases of system functioning are compared, looking at the integrating
principle as a reference point for the whole functioning. The concept of coherence is often
47
used as a reference point for evaluation of the fitness of institutional change . The latter CIA
(2) does not start with a general monitoring of institutions. It selects firstly an ordering
criterion, which is not a taxonomy but a coordination principle or a general organisational
arrangement. It could be worth concentrating on two examples which illustrate different
views of complementarity: Aoki’s CIA and the Social systems of innovation and production
48
(SSIP) (Amable, 2000) .
In Aoki (2000; 2001) the coordination scheme itself is an isolating abstraction
49
which
defines the system to be compared. In his view organizational forms match best some – formal
and informal – institutions and give birth to coherent coordination schemes. Such schemes
determine the division of labour and therefore the direction of processes increasing
productivity. In this (industrialist) perspective different ways of producing growth and
welfare exist which are all good and differ in their specialisation. The game forms for studying
this interaction are not so many and therefore the comparison is directed at singling out
organizational and institutional factors which serve as complementary elements.
A similar logic is adopted by SSIP, which depicts four main ideal-types of national
innovation systems as general coordination forms. These are the market system (U.S. G.B.
46
We can refer to Ferrera (1996) or to Esping Andersen (1990).
The concept of coherence has in fact been introduced by the theory of Régulation in order to single out
the possible conflict of norms or inconsistencies of coordination forms. It has also been developed in a
way more compatible to individualism by Aoki who further developed the concept of multiple equilibria
by means of the concept of complementarity of institutions and organizational forms.
48
See also Amable and Petit (2001).
49
I use this term which is taken from Eucken (1950; see also Labrousse and Weisz, 2000).
47
19
and Australia) privileging flexibility, the meso-corporatist system of Japan, the continental
European model of France, Germany, Italy and Belgium where the state plays an important
integration role and, finally, Scandinavian social democracies. The main difference between the
two approaches is the bottom-up view of Aoki and the top-down view of Amable who opted
for an ideal typical approach to the forms instead of a game theoretical coordination analysis.
It is worth further highlighting the epistemological diversities between Aoki’s CIA and
SSIP. In Amable (2000) SSIP is built up from a general redundant principle and some sectorial
50
relevant institutional fact is listed and compared as part of an ideal-typical model .
Eventually, some stylised consequences are derived from indicators of qualitative performance
of the economy. Here, the “generating principle” has the aspect of an organizational form and
institutional forms are ordered consequently and coherently. SSIP does not consist in a
framework to a parallel comparison of parts of a system. It is the order of relationships which
is compared, together with sectorial institutional facts, in relation to the outcomes. A strong
isolation hypothesis is needed in this approach to assume the ideal-typical form as a
determinant order minimising the effects of hybridisation, anomalies and singularities. This
kind of comparison based on general stylisation is, however, in line with the tradition of
varieties of capitalism (the follow-up of Schonfield, German socio-economics…).
Aoki’s CIA does not build up a model from a general principle concerning the general
organizational form, but builds it from an incidental complementarity among specific
institutional elements emerging by microeconomic strategic interaction, the latter assuming
the status of isolating abstraction principle. Here again,
the two main elements of the
comparison are a co-ordinating mechanism emerging from a game form and a functional
51
subdivision of the economy to detect the basic institutional forms . Therefore, Aoki’s CIA is
more bottom-up oriented and open to path-dependent evolutionary dynamics. Moreover, it
builds up a model from observed interactions and not from a general functional principle. It is
however difficult to analyse evolutionary processes given that many institutional factors of the
economy may not be included in the organizational equilibrium. The main problem is that
most of the economy and institutions are not included in the game-form and therefore this
approach is not exactly an inclusive representation of a country. Moreover it has not overcome
some of the basic problems of game theory as a tool for applied studies, namely the difficulty
in defining payoffs.
8. Co m par ison as a pr ocess
50
SSIP represents one of the Régulation family approaches.
Markets and money; legal and political rulings by the state; contracts and private order organizations;
cultural beliefs and social norms (Aoki, 1996 p. 3).
51
20
When we assume relationships among institutions as a relevant aspect, the problem of
comparing evolving economies can be tackled by splitting it into phases. We can study the
problem of the role of institutions in the co-ordination of economic activities first, and only
in the following steps connect the coordination form – together with other structural variables
– with economic outcome. Therefore, “comparison” here does not mean a straight evaluation
of the performance of institutions. CIA in the first instance uses the comparative method to
build empirical evidence on the organizational diversities of the single economies, which is
often not fully appreciated by economists. The basic assumption is obviously that differences
matter and the aim is to obtain a good intelligibility of the role of institutional arrangements.
Moreover, diversities of coordination match diversities in specialisation, sunk assets and
development processes. However, CIA has been theorised in order to develop some economic
analysis even in situations of incomparability and non-direct calculability of economic
outcomes. The reasoning may be consequently divided into three steps.
a) The first step is devoted to drawing pictures of forms of coordination, to understand how
the pattern of division of labour
52
is structured by interconnected institutions. Here
comparison based on similarities and differences helps to foster relevant institutional
complementarities and the basic synergies in each economic system. CIA may show how
institutions cluster in different ways to solve coordination problems according to different
resource endowments and different ethical objectives.
b) Secondly, the connection between the institutional configuration and the production of
added value in the long run has to be theorised. The aim is to extend the concept of economic
organization to the whole economy, connecting institutions to assets and technologies.
Consequently, the way productivity gains are achieved, retained and distributed in the
economy is investigated according to the institutional configuration. Comparison here has to
single out the differences in economic organization of economic systems which obtain similar
results and provide some evidence concerning the sources of growth.
c) Thirdly, some hypotheses should be worked out concerning how a change of an institution
may affect the coordination pattern so that the direction of development may change and offer new
opportunities for growth, given the existing technological opportunities. Here again,
comparison plays an important role showing how certain configurations are viable and allow
economic opportunities to be exploited better than others by connecting the concept of
coordination to that of efficiency.
The last point is the most complicated, even though once point (b) is achieved, it is less
hazardous to formulate some hypotheses on how growth may be affected by a change in the
52
When we talk about division of labour it is implicit that a series of consequences such as the division
of added value are included in the concept.
21
53
coordination pattern . Growth is obtained by investing, introducing new technologies,
adapting the pattern of economic organization and has to be supported by a proper
institutional configuration. Institutions adapt as a response to new opportunities (Demsetz,
2000, p. 78) or should be modified if they do not adapt and pose obstacles to new
opportunities (North, 1991). Then, how the new coordination form affects the opportunity
set of the main actors in the economy in a way that a viable coordination permits achievement
of new productivity gains should be studied. Therefore, an accurate study has to be carried out
and no nirvana fallacy or disembedded sectorial study can provide this general perspective.
9. Co nclus io n: CIA as a n ana lyt ical dev ice
The present problem of designing economic reforms founds some theoretical problems on
the definition of a desirable institutional configuration governing the economy. This issue
becomes complex when we wish to include economic and political objectives at one time. We
have argued that two main views are relevant: the single optimal configuration and the variety
of capitalisms. The former conceives one form of configuration as optimal and considers any
departure – suggested by equality, democracy or other ethical issues – as a loss in the potential
income. The latter affirms that, given the complex interdependencies between resource
endowments, culture, institutions and technologies, different ways of arranging institutional
configurations are possible and therefore there is room for discretional fixing of some
institutions preserving some political objectives.
Comparative institutional analysis is a relevant instrument for producing evidence useful
for theorising these issues. It may be applied to both views of capitalism, however, we have
argued that some techniques of analysis implicitly lead to the former view and therefore
researchers should pay attention to epistemological assumptions. CIA is a particularly
precious instrument for the second view which, we have argued, is the more realistic approach
when dealing with large economic systems. However, CIA presents some additional
difficulties in relation to standard cost-benefit methods, it deals mainly with problems
concerning coordination and it can only indirectly infer conclusions on efficiency. This risks
producing a certain degree of indeterminacy in comparing institutional configurations in
relation to their economic outcomes. This complexity does not allow us to provide simple
solutions to the problem. As a consequence, we have argued that CIA requires a sequence of
theoretical steps where a plurality of analytical techniques may be used. After presenting a
variety of different theoretical approaches to CIA, we have singled out two concepts,
complementarity and viability, which have been proposed as the main standpoints for a
theoretical framework able to reduce the extent of approximations and indeterminacy of CIA.
53
Some application of this principle can be found in Solari (2004b).
22
The former principle, complementarity, proposes a microeconomic perspective on the
matching effects among structural elements responsible for enhancing coordination coherence
and fitness to assets. The latter principle, viability, is defined from an "order" perspective and
is connected to political economy issues such as conflict management, acceptable income
distribution and reproduction of major social patterns. Viability is therefore strictly connected
to a theory of the state intended as the fundamental form of collective action to foster
organized economic activity. The two principles are not conclusive “di per se”, rather they
help connect institutional arrangements to technology, stock variables and political
preferences.
The comparative approach to institutions therefore plays a double role: it is a "framing"
tool since it helps to define concepts and order facts in the right categories; it is a technique
which can provide an evaluating principle by assessing similarities and differences. As an
interpretation technique CIA can provide an in-depth description of economic systems by
singling out the relevant structural interconnection between institutions. As a judgement
technique it can provide an evaluation of the results of institutional change.
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