on institutional innovation

ON INSTITUTIONAL INNOVATION

DOUGLASS NORTH

ON INSTITUTIONAL INNOVATION

“Devising an institutional framework that will make possible development in the 21st century requires a clear understanding of the way instituions evolve as a prerequisite to effective policymaking. One cannot effectively desing institutions without an insight into what instittions are, how they relate to organisations, and how they change.” (NORTH, 1994,p. 48)

A THEORY OF INSTITUTIONAL CHANGE NA THE THEoRY NEOCLASSIC

A theory of institutional change is essential because the tools of neoclassical theory (and other theories in the social scientist´s toolbag) cannot satisfactorily account for the very diverse performance of societies and economies both at a moment of time and over time. (NORTH, p. 48)

AS POSSIBILIDADES E LIMITES DA TEORIA NEOCLÁSSICA

“The models derived from neoclassical thoery may account for most of the diffrenece in performance between economies on the basis of differential investment in education savings rates, and so on, (Mankiw, Romer, and Weil, 1991) (NORTH, 1994 p. 48)

AS POSSIBILIDADES E LIMITES DA TEORIA NEOCLÁSSICA

“The models derived from neoclassical theory [...] do not explain why economies would fail to undertake the apprpriate acitivities if they have a high payoff. Instituions detemine the payoff (Mankiw, Romer, and Weil, 1991) (NORTH, 1994p. 48)

INSTITUTIONS DETERMINE THE PAYOFF

Instituions detemine the payoff. They are the strucutre that humans impose on human interaction, and therefore tey define the incentive that (together with the other constraints – budget, technology, and so forth) determine the choice individuals make that the prformance of societies and economies over time. (NORTH, 1994p. 48)

FRAMEWORK FOR ANALYSIS OF INSTITUTIONS: Basic Assumptions

“This framework builds on the basic assumption of economic theory of scarcity and therefore competition and hence choices subject to constraints(NORTH, 1994p. 48/49)

FRAMEWORK FOR ANALYSIS OF INSTITUTIONS: New Assumptions

“(I)t incorporate new asumptions both about the constraints that individuals face and about the process by which they make choices within those constraints. Tradtionla neoclassicla assumptions that ar relaxed are those of costless exchange, perfect information, and unlimited cognitive capabilities(NORTH, 1994p. 48)

FRAMEWORK FOR ANALYSIS OF INSTITUTIONS: Approach vs. Theory

Too many gaps still remain in our understanding of this new appraoch to call it a theory. What is do provide is a set of definition, principles, and a structure that make up much of the scaffoliding necessary to build a theory of institutional change.

(NORTH, 1994p. 48)

FRAMEWORK FOR ANALYSIS OF INSTITUTIONS

“I begin by making a disticntin essential to any understanding of institutional change – that between instituions and organizations. (NORTH, 1994p. 49)

INSTITUTIONS

“Institutions consist of formal rules, informal constraints (norms of behavior, conventions, and self-impsed codes of condut) and the enforcement characteristics of both.” 1994, p. 48)

INTITUTIONS

“In short they consist of the structure that humans impose on their dealings with each other.(NORTH, 1994, p. 49)

INSTITUTIONS

“The degree to which there is an identity between the objectives of the institutional constraints and the choices individuals make in that institutional setting depends on the efetivenesss of enforcement.” (NORTH, 1994, p. 49)

INSTITUTIONS AND ENFORCEMENT

“Enforcement is carried out by the first party (self-impsed codes of coduct), by the second party (retaliation), and/or by at hird party societal sanctions or coercive enforcement by the state). (NORTH, 1994, p. 49)

INSTITUTIONS

“Instituions affect economic performance by determining (together with the technology employed) transaction and transformation (production) costs.(NORTH<,1994, p. 49)

ORGANISATIONS

“If institutions are the rules of the game, organisations are the players. (NORTH, 1994, p. 49)

ORGANIZATIONS AND PURPOSIVE ACTIVITY

Organisation are made up of groups of individuals engaged in purposive activity. The constraints imposed by the institutional framework (together with the other standard constrainsts of economics) define the opportunity set and therefore the kind of organizations that will come into existence. (NORTH, 1994, p. 49)

ORGANIZATIONSInstitutional Matrix, Incentive Structure and Kwnoledge

Given the objective function of the organization – [...] – organizations such as [...] will engage in acquiring skills and knowledge that will enhance their survival posibilities in the context of ubiquous competition. The kinds of skills and knowledge that will pay off will be a function of the incentive structure inherent in the institutional matrix. (NORTH, 1994, p. 49/50)


“If the highest rates of return in a society are from piratarcy, the organzations will invest in kowledge an skills that will make them better pirates; if the payoffs are higest from increasing productivity, then firms and other organizations will invest in skills and knowledge that achieve that objective. (NORTH, 1994, p. 50)


“Organizations will not only directly invest in acquiring skills and knowledge but will indirectly (via the political process) induce public investment in those kinds of knowledge that they believe will enhance their survival prospects.(NORTH, 1994, p. 50)

ORGANIZATIONSInstitutional Matrix, Incentive

Structure and Hospitable Environment

“It would be a mistake to conceive of the role of organizations as some mechanical response to the institutional incentive structure. The ideal incentive framework will not only reward prouctive activities but will provide a hospitable environment for the creativite designing by entrepreneurs of new institutions to solve new problems.

(NORTH, 1994, p. 50)

INCREMENTAL INSTITUTIONAL CHANGE

INSTITUTIONAL CHANGE

AGENTS, SOURCES, PROCESS AND DIRECTION

AGENTS OF INSTITUTIONAL CHANGE

“The agent of change is the (political or econmic) entreprenuer, the decision maker(s) in organizations. The subjective perceptions (mental moels) of entrepreneurs determine the choice they make.(NORTH, 1994, p. 50)

SOURCES OF INSTITUTIONAL CHANGE

The sources of change are the opportunities perceived by entrpreseurs. They will stem from either xternal changs in the environmets or form the acqusition of learning and skills that, given the mental constructs of the actors, will suggest new opportunities.”(NORTH,1994,p. 50)


Changes in Relative Prices in the Taste

“Changes in relative prices have been the most commonly observedexternal sources of institutional change in history, but changes in taste have also been important


The Acqusition of Learning and Skill

“The acquisition of learning and skills will lead to the construction of new mental models by entrepreneurs do decipher the environment, which in turn will alter perceived relative prices of potential choices.(NORTH, 1994, p. 50)


The Changes in Informal Constraints

“Instituional chage resulting from changes in informal constrants – orms, convntons or personal standard or honesty, for example, will have the same originating sources of change, such as learning or relative price changes. (NORTH, 1994, p. 57)


The Changes in Informal Constraints

“[The changes in informal constrainsts] will occur far more gradually and somtimes quite subconsciusly as individuals evolve alternative patterns of behavior consistent wth newly perceived evaluation of costs and benefits. (NORTH, 1994, p. 57)


“In fact it has usually been some mixture of external change and internal learning that determines the choices that lead to institutional change.” (NORTH, 1994, p. 50)

DELIBERATE INSTITUTIONAL CHANGE AS DEMAND OF

ENTREPRENEURS

“Delibertive instituional change come about the about therefore as a result of the demands of entrepreneurs in the context of the perceved costs of altering the institutional framework at various margins.

DELIBERATE INSTITUTIONAL CHANGE AS DEMAND OF

ENTREPRENEURS

“The entrepreneurs will weigh the gains to be derivied recontracting within the existing institutional framework against the gains from devoting resources to altering that framework.” (NORTH, 1994, p. 50/51)

INSTITUTIONAL CHANGEAND THE TRANSACTION COSTS

IN THE POLITY AND IN ECONOMY

“Bargaining strenght and the incidence of transaction costs are not the same in the polity as in the economy. (NORTH, 1994, p. 51)

INSTITUTIONAL CHANGEAND THEPERCETIONS OF THE

ENREPRENEUR

“Thus entrepreneurs who perceive themselves and their organizations as relative (or absolute) losers in economic exchange as a xonsequence of the existing structure of relative prices can turn to the political process toright their perceived wrongs by altering that relative price structure. (NORTH, 1994, p. 51)

INSTITUTIONAL CHANGEAND THE PERCETIONS OF THE

ENREPRENEUR

“In any case the perceptions of the entrepreneur – correct or incorrect – are the underlying sources of action

(NORTH, 1994, p. 51)

INSTITUTIONAL POLITY CHANGE

ALTER THE RULES BY WHICH OTHER RULES ARE

MADE

INSTITUTIONAL CHANGEThr Process of Change Incremental

“The process of chage is overhelmingly incremental. The reason is that the econoies of scope, complementarities, and network externalities that arise from a given institutional matrix of formal rules, informal constraints, and enforcement characteristics will typically bias const na benefits in favor of choices consistent with the existing framework. The larger the number of rule changes, ceteris paribus, the greater the number fo loser and hence opposition.“ (NORTH, 1994, p. 51)


“.[...] (I)Institutional change will occur at those margins considered most pliable in the context of the barganing ower of interested parties. (NORTH, 1994, p. 51)


“.The incremenal chage will come from a change in the rules via statute or leal change. Alternatively, changes in informal constrainsts will be a very gradual withering away of na accepted norm or social convention or the gradual adoption of a new one as the nature of the political, social, or economic exchange gradually changes.“ (NORTH, 1994, p. 51)

INSTITUTIONAL CHANGEThe Direction of Process of

Change Incremental

“.The direction of change is determined by path dependence. The political and economic organizatins that have come into existence in consequence of the institutional matrix typically have a stake in perpetuating the existing framework.“ (NORTH, 1994, p. 51)

INSTITUTIONAL CHANGEThe Redirection of Process of

Change Incremental

“Alteration in or reversal of paths is a result of external sources of change, which weaken the power of existing organizations and strenghen or give rise to organizations with different interests, or a result of the unanticipated consequences of the policies of the existing organizations. “ (NORTH, 1994, p. 52)

INSTITUTIONAL CHANGEAND THE ENTREPRENEURS´

MENTAL MODEL

(T)he entrepreneurs´mental models determinnig the choice they make produce consequences at variance with their desired coutcomes; the weakening of the power of existing organizations and the rise of organizations with different intersts follow..(NORTH, 1994, p. 52)

INSTITUTIONAL CHANGEAND THE ENTREPRENEURS´

MENTAL MODEL

“The actor critical will be political entrepreneurs whose degrees of freedom will increase in such situationss and, given their perception of the issues, will give them the ability to induce the growth of (or strengthen existing) organizations and groups with diferent intersts.(NORTH, 1994, p. 52)

REVOLUTIONARY INSTITUTIONAL CHANGE

REVOLUTIONARY INSTITUTIONAL CHANGE AND

THE LACK OF MEDIATING INSTITUTIONS

“Revolutionary change wiil occur as a result of gridlock arising from a lack of mediating instituions and oranizations, which enable conflicting parties to reach compromises and bargains that capture some of the gains From potential trades. (NORTH, 1994, p. 51)


THEINABILITY TO ACHIEVE COMPROMISE SOLUTIONS

“”The inability to archieve compromise solutions may also reflect limited degrees of freedom of the entrepreneurus to bargain and stilll maintain the loyalty of their constituent groups..(NORTH, 1994, p. 52)


THEINABILITY TO ACHIEVE COMPROMISE SOLUTIONS

“” Thus the real choice set of the conflicting parties may have no intersection, so that even though there are potentially large gains from resolving disagrements, the combination of the limited bargainning freedom of the entrepreneurs and a lack of facilitating institutions makes it impossible to do so.(NORTH, 1994, p. 52)

REOLUTIONARY CAHNGE AND THE INFORMAL CONSTRAINTS

“Revolutinary change is never as revolutionary as its rhetoric [...] the formal rules may change overnight but the informal constraints cannot [...] to produce aaaaaaa new equilibrum that is far less revoltonary thant the rethoric. (NORTH, 1994, p. 52)


THE LACK OF MEDIATING INSTITUTIONS

“The key to the existence of such mediating poliical (and econicc) intitutions is not only formal can foster dialogue between conflicting parties.”(NORTH, 1994, p. 52)

THE IMPICATIONS OF AN INSTITUTIONAL FRAMEWORK

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