A. Allan Schmid e-mail firstname.lastname@example.org
Michigan State University
Do different economic theories lead to different empirical models and do these different models lead to different explanations of the substantive consequences of alternative institutions? Do heterodox journals publish empirical studies testing the effects of alternative institutions on economic and social performance? I do not want to suggest that the only criterion for judging different theories is their effectiveness in formulating different empirically testable research hypotheses about alternative institutional designs, but it is one important dimension. There is a large literature describing differences in theories , but a smaller literature extending that to detailed specification of alternative empirical models. Heterodox literature emphasizes that its theory is holistic, evolutionary, non deterministic, etc., but what does that mean in practice for model specification?
The research examined in this paper includes studies in which there is some economic phenomenon to be explained by the effect of alternative institutions holding other relevant variables constant by experimental design or econometrics. These studies will be unified by use of a “situation, structure, and performance framework” (Schmid forthcoming). The inherent character of the good or service that creates human interdependence is noted. These situations include exclusion cost, economies of scale, transactions costs, etc. These sources of interdependence are more or less explicit in various heterodox (and orthodox) theories and applied research. The structure of alternative institutions that influence performance outcomes are the independent and dependent variables respectively. The applications noted here range from small business policy to interest group power, corporate structure, discrimination in lending, labor institutions and political rules for making rules. Implications will be drawn for the future of heterodox economics.
This paper is limited to an institutional impact analysis and does not address institutional change and evolution wherein the dependent variable may become independent in the next period.
This paper is addressed to differences among heterodox theories rather than contrasting heterodox with orthodox theories, but since the latter is more common, some will be included. Ideally, I would like to find studies with the same dependent variable (same economic outcome to be explained) and alternative independent variables representing different institutions. The different heterodox theories would include different independent and control variables and specify each variable and its relationship to other variables in a different manner. I can tell you now that I have not found a large supply of such studies. A model of what we are looking for here can be nicely illustrated with an example contrasting neoclassical and institutional theories explaining the change in women’s participation in the labor force. Becker (1981), drawing upon orthodox theory, insists that the only explanation can be a change in women’s labor productivity leading to changes in relative prices over time—changes in the opportunity cost of forgoing formal labor force participation. Simon (1986) on the other hand, suggests that part of the explanation must lie in a change in customary social control: ideology and preferences. Neither of these men it turns out has done much empirical work to test their theory. For Becker, it is quite unnecessary since the theory is so powerful in excluding any other possible explanation. It is a bit like the effect of minimum wage on employment. The theory is so straight forward, that no one bothered to test it, save recently by Card and Krueger (1995), who by the way found that a higher minimum wage did not cause more unemployment. These examples of how different theories lead to different variables in empirical tests (and even different research agendas) provide a feel for the topic of this paper.
What alternative policies are available to stimulate the development of small business? The policy variables that are chosen depend in part on one’s theory of the firm (markets) and what is considered the source of interdependence among firms. One theory sees the firm as a black box within which resources are combined in an optimal fashion depending on the production function and relative prices. Prices are generated in simple auction markets. Entrepreneurs are rewarded based on their efficiency and labor based on its marginal value product. If labor does not perform as contracted, they are fired. Human relationships are of minor importance. The so-called “new institutional economics” went a bit further and said that the firm was a governance institution, but again, the alternatives of market vs. hierarchy were chosen to reduce transaction costs and maximize profits.
Small business (any business) faces interdependencies created by uncertainty and possible scale economies. Alternative institutions interact with these situations to produce different outcomes. Evolutionary economists see the firm as learning and competence based (Hodgson 1999: chapter 11). The firm is more that a collection of human capital in the skills of individual employees. Knowledge is embedded in social structures. “It is context dependent, culture-bound and institutionalized (256).” Shared experience and routinized behavior are important. In addition, there are two ways to deal with economies of scale. One is simply to have large firms and another is to organize small firms to act together to obtain scale economies.
How do these perspectives play out in the design of small business policy? Parker (2002) contrasts policy differences in Australia and Denmark. One approach has “relied on the provision of financial incentives and the re-instatement of market relations, where they had previously been eroded through government regulation (948).” Australia is typical of this approach that Parker labels the “Competitive Model.” Reforms were instituted in the areas of taxation, workplace relations, and unfair dismissal of employees. The theme is that competition will emerge and prosper if government action does not increase costs. Australia had a system of national, industry, or occupational wage fixation through industrial tribunals. More recently, government allowed labor agreements in individual firms with or without unions. The general theory is that firms will take on new employees if they are cheap and can’t complain about work conditions. And, if the government lowered taxes. The catch phrase is to reduce red tape, as if regulations provided no welfare to workers, merely costs to employers. Government’s role was limited to management training of entrepreneurs. Progress is based on each entrepreneur doing her/her best.
The small business policies of Denmark are in sharp contrast. Parker calls it the “Coordinated Model” or the negotiated model. Denmark has retained it national collective bargaining (?). The government seeks to form networks of firms and public agencies to build highly competent agglomerations. It fits the above noted literature that is known as the “competence theory of the firm.” The government and private firms have established a network of technological information centers that search for solutions to technological problems common to a business sector. The policy acknowledges the advantage of economies of scale in large firms and tries to achieve some of its advantages with a network of small firms. It has something in common with an US association of small independent grocery stores that buy goods from a common wholesaler.
The Danish model of technology development is not that of the lone creative genius who has an idea for a new product and starts a new firm and who is willing to assume high risk in the hope of high returns. It is not simply entrepreneurs calculating the probability of success and going for it. Rather it is a model of technology development with many contributors and an economy of agglomeration. The Danes call it “clusters of competence.” “Private industrial councils have emerged in local areas involving public authorities, the technology centers established under government policies, banks, and research and technology parks (Parker 2002: 946).” It is related to the Silicon Valley story of complementary firms lowering costs by making it possible to interact and receive inputs from nearby sources. One can take risk as given and hope that if enough are willing to try, a new industry can be created on the striving of an individual. Or one can try to reduce that risk by collective action. One of the dominant stories of the creation of the computer industry in the US, for example, was the co-evolution of innovation and demand for its products (Mowery and Rosenberg 1998). The government (the military in this case) not only provided much of the research dollars, but also assured the new industry of a demand for its products if successful. The Danes, for example, created a Childrens’ Play and Learning Cluster of competence emphasizing “the spin-offs for private companies in leisure, entertainment, and childcare facilities that arise from the well-funded public childcare infrastructure (947).”
The Danish theme is international competitiveness with a better technology and coordination of expertise rather than cheap labor. Some argue that “Governance systems with cooperative labor relations, quality worker training programs, large powerful unions, and close assembly-supplier relations tend to benefit firms competitiveness more than systems with weak unions, conflictual labor relations, poor training programs and distant or unequal assembly-supplier relations (Schmidt 1996: 239). Parker is not willing to go this far. From other literature, it is suggested that the coordinated model typical of Germany, Sweden, and Denmark is oriented toward incremental innovations and new technologies in existing production activities while the competitive model is suited to more radical innovations by new firms. It is this hypothesis that Parker tests with some modest data comparisons from the 1990s.
High & medium
technology industries-- ----------8.7 4.1
& Business Services-- 23.9 26.1
& personal services-- 7 14.9
This data does not tell us very much about economic growth in the two countries, but it does suggest something about the quality of jobs in the two economies. How would different paradigms build on this study? The World Bank conducts a lot of research regressing a number of explanatory variables on rates of economic growth for nations (Islam and Montenegro 2002). Knack and Keefer (1995) for example, use various policy variables constituting the so-called Washington consensus to explain differences in economic growth—variables such as exchange rate policy, government debt, and various governmental variables such as degree of democracy and freedom of the press. If researchers can construct an index of democracy, could they categorize countries into those following a “competitive” vs. coordinated/negotiated small business policy? Or perhaps a continuous index thereof? Would heterodox economists come up with a different list of independent variables than does the World Bank? It should be noted that the Bank recently has used social capital (trust) as an explanatory variable (Knack and Keefer 1997). Such models are in contrast to the old models of economic growth such as that of Harrod-Domar that include only such things as saving rates and perhaps, more recently, stocks of human capital.
Interest groups that want a policy that once in place is available to all whether or not they contributed to its creation face a free rider problem because of high exclusion cost. They are at a disadvantage relative to concentrated interests who are the beneficiary of specific government actions. With respect to corporate subsidies, it is common to see states and cities compete with tax subsidies to attract industry. A research program suggested by this theory would try to find examples where different institutions and ideologies overcame the free rider problem and allowed diffuse groups to have their interests count (Schmid & Soroko 1997).
Alternatively, Marxists might hypothesize that corporations will be successful in getting subsidies and other benefits in spite of objection by consumer groups or general public because ownership of the means of production means the state is obligated to aid firms in the reproduction of their capital. This theory would give little attention to differences among capitalist firms. Public choice theory doesn’t have much place for institutions that enable unequal power distributions. Becker (1983) would explain the relative ability to use government in terms of the costs and benefits to individual firms. If firm A has more net returns from lobbying than another firms or the general public, it will be successful. Lobbying is just another enterprise guided by profit maximization. Becker’s theory is similar to his explanation of women’s labor force participation;: only costs and benefits matter (relative prices).
What do institutionalists have to offer? Is an institutional theory simply one with explicit institutional variables? Ideology in the case of Simon’s alternative to Becker above; or, networks and routines in the case of small business policy? Hudson (2002) offers a case study of professional sports team’s ability to get subsides from city governments as an opportunity to test alternative models. Professional teams in general have been quite successful in getting cities to build stadiums for them and even earn profits on the food and drink concessions within them plus rental of luxury suites. If it were simply a matter of class ownership, all would be equal. If it were only costs and benefits, then if this is held constant, all teams would get the same goodies. But, some are more successful than others. Why?
Hudson following the inspiration of Veblen, hypothesizes that the power to place investment is the power to obtain benefits from the state. Relative success is a matter of differential ability to play one city off against another. Veblen called this “sabotage.” “The institutional theory would predict that teams with higher opportunity cost of remaining in their current location should be more likely to receive transfers (1088).” “If an examination of the teams who have received subsidies finds that they are predominantly plagued by lower profitability, this would favor institutional over public choice theory (1088).” Low profit teams that are being sought by cities without professional teams are in a position to bargain for new subsidized stadiums. The data from basketball and football suggest “that the year to year profits of the teams receiving subsidies were, in general, on the low end of their respective leagues (1090).”
What does this say about alternative institutions? In what sense is the ability of capitalist sports firms to play off one city vs. another a matter of institutions? It is clear in Marxian theory that a capitalist ownership class can force the state to help reproduce the firm and its capital. At a less aggregative level, the ability to take advantage of differences in opportunity costs depends on the rights of collective bargaining. This is clear in the case of labor where wages can be forced down if individual workers are presented with a take it or leave it offer. Can you imagine a pact among cities agreeing to a standard contract with team owners with common terms for subsidizing (or not) stadiums? The supply of franchises is an institutional matter. The team owners have the right to limit the total number and any move by a team. For some time, a unanimous vote of owners was required to permit a team to move from one city to another. To be sure, the actions by one team affected the profits of others. But, would not all firms in an industry like to vote on competitor’s movements? Hudson calls attention to a change in the rules requiring only three-quarters of owners to approve relocation. Hudson hypothesizes but does not test the idea that “the increased incidence of subsidization is a result of the changing league rules of relocation (1094).”
Hudson’s empirical analysis does not provide a test of the impact of alternative institutions. It seems logical that the ability of different sports firms to use the government depends on their right to bargain individually with each city (or conversely the non-right of the cities to bargain collectively), but we have no direct evidence for this. Hudson does note that in the UK, where there are many teams in every major city, the local governments do not subsidize stadiums. He presents no data on how this supply evolved.
What would an explicitly Marxist model look like? Would it have to compare whole countries with different degrees of capitalism and state ownership? Marxists would probably not collect data on the opportunity cost of moving in different locations if they regard power as a class matter and local differences don’t much matter. In support of the hypothesis that power emanates from ownership of the means of production, it can be noted that military bases are public firms, but the public owner does not play off one state or city vs. another to subsidize the bases. States do compete, but largely in terms of the general power of its political representatives influenced by seniority, skill in forming voting alliances, vote trading, etc.
Firms in an industrial sector (supply chain) are buying and selling inputs and products among themselves. For example, an electric utility company with a nuclear power plant buys construction, waste disposal, and financial services. It sells to consumers and other power companies. These activities can be coordinated in auction markets. But when the activities are complex and involve investment in specific (fixed) assets, there are possibilities for opportunism. Williamson using an efficiency perspective, hypothesizes that firms will form hierarchies (integrate) or other kinds of alliances to minimize transaction costs. In general, Williamson argues that efficiencies in transaction costs savings are more important for consumer welfare than any anti-competitive price exploitation. Institutionalists are concerned with another use of integrated power, namely, using financial resources to influence government (Dugger 1989). Integration (mergers) is only one way to coordinate firms in an industry. Interlocking boards of directors is another. Let’s examine three pieces of recent empirical research. They ask somewhat different questions and use different explanatory variables.
Fligstein (2001), an economic sociologist, asks if membership of financial organizations (banks) on corporate boards affects their profitability. Using a data set of the one-hundred largest corporations in the US in 1969, he found no correlations between profitability in the next ten years and bank interlocks. Neither was there correlation with whether the firm was closely held or had a multidivisional structure. What was significant, was the background of the CEO. A firm headed by a CEO with a finance background did better than firms headed by marketing and sales people. He argues that during this period, firms were dominated by finance strategies emphasizing diversification and assembly of portfolios of assets. Unrelated product lines (conglomerates) did less well. Fligstein recognizes the fundamental uncertainties facing firms. Their world is not the textbook one of equilibrating known marginal cost and marginal revenue, but rather proxies, themes, and routines that suggest profitability. These are subject to social interpretation and business culture. While Williamson assumes that managers know the connection between business structures (private governance) and profitability, Fligstein regards this as subject to social learning and likens it to a social movement. His story of this evolving theme (standard operation procedure) of the year (or decade) is more convincing that his econometrics in explaining profitability. “My models do not explain a lot of the variation in financial performance in 1970…(136).”
Can an extended Marxian model do better? Bowles, Gordon, and Weisskopf (1998) formulate a model with the following power related variables in addition to the usual prices: worker resistance, cost of job loss (affected by unemployment benefits), terms of trade, military power, government regulation (for example worker safety), capital’s tax share while controlling for capacity utilization. These variables are statistically significant in explaining non-financial corporate business net after-tax profit rates for 1951-79 with an adjusted R-square of .9.
Fligstein develops a “political-cultural theory” of the firm to understand how firms reduce uncertainty by developing an understanding among firms in related industries to limit competition. The theory is complementary to the “social structure of accumulation theory” of (Gordon 1980). The political part of the theory is related to institutionalist concern with corporate influence over government in such matters as taxes and labor laws. Hayden, Wood, and Kaya (2002) provide data with which to test the latter. Instead of a sample of all firms, Hayden examines the 72 largest firms in the nuclear power industry who very much care about the activities of a five state Central Interstate Low-Level Radioactive Waste Compact (CIC). The CIC is pursuing a new waste disposal site even in the face of “drastically decreased waste volumes and radioactivity levels, excess disposal capacity nationwide, a developer in financial trouble, cost overruns, exorbitant costs to develop new facilities, and the rejection of its license application to build a facility in Nebraska (672).” Hayden implies that it is in the interest of the various interdependent firms in the industry to do so. Thus, he explores the institutional means to their political influence. He develops a new method of measuring power blocs among related corporations featuring strings of membership of one corporation on another’s board. For example, one bloc set is made up of Peter Kiewit, a construction firm; Berkshire Hathaway, a financial firm; and two electric power firms. Each of these may in turn be represented on other boards that are part of another string. Hayden calls this a “translocked structure of corporate power blocs.” The number of corporations reached by each corporation caring about nuclear power in the five states is qualitatively impressive.
The power bloc data in different industries could be an explanatory variable explaining differences in political influence, but Hayden has not yet made that step. He speculates, “The power bloc is utilized by corporations to formulate networks of collusive decision making and action by the overlapping boards of directors.” “The prevailing corporate model today is one of powerful integrated conglomerates that have numerous horizontal ties with each other and government agencies, and vertical ties with small-scale producers and contractors (699).” How might this research proceed? Wouldn’t it be nice if there were several other interstate compacts with different degrees of translocked structures among the relevant firms? And, of course, data for other variables that one would like to hold constant in the observations. There are reasons why there are relatively few empirical studies of the impact of alternative institutions, including that of privileged data on the inside workings of corporations.
Informal institutions can have as powerful an effect on behavior as formal ones—sometimes overpowering the formal ones. An example is gender and racial discrimination. Access to jobs, education, and credit can be conceptualized as incompatible use goods where the interests of the would-be beneficiaries of discrimination and would-be beneficiaries of access are in conflict. Property rights determine whose interests count. With respect to mortgage loans, informal norms and habits may discriminate on the basis of sex, race, women with and without children.
Robinson (2002) specified the following model: probability of denial equals a function of the applicant’s ability to carry the loan, risk of default, potential loss in case of default, terms of the loan, and personal characteristics such as race, age, children, and gender. The suspected informal institution was “an ideology that says that white women who stay home to raise their children are performing a socially valued service and should be rewarded, where their African-American/Hispanic counterparts are not (74).” The findings were: For white-females working, the probability of denial was 28.4% greater if there were children. In contrast, for African-American/Hispanic women not working, the probability of denial was 46.8% greater if there were children.
The formal institution of the US Equal Credit Opportunities Act of 1972 specifically defined the then common practice of refusing to consider, or discounting, the wages of working mothers as illegal discrimination. The data suggest that the formal law is superceded by informal cultural norms. The author reviewing the literature speculates, “This pattern of racial differentiation may reflect social norms dating back to slavery that have favored labor force participation for African-American and Hispanic mothers but not white mothers (63).” Of course, this “participation” by female slaves was hardly voluntary.
Note that the existence of an informal norm is inferred from the econometrics. To determine if a change in formal or informal institutions produced a different performance would require observations before and after 1972. Could the existence and change of an informal norm be documented over time? Could you imagine directly or indirectly asking loan officers about racial and gender attitudes? If this were possible, research could establish if differences in informal institutions across firms, industries, or states had an effect on performance. However, it is hard to measure the presence of informal norms when some are socially unacceptable but nevertheless extant. Changes in formal rules are easy to document and simple trends lead to statements such as the following: “there is a strong consensus that racial wage inequality declined sharply for nearly a decade after passage of the Civil Rights Act of 1965 (Mason 2000:320).”
The Equal Employment Opportunity Commission was designed to remove the burden of Title VII disputes from the claimant. The idea was that women’s rights would be better safeguarded if they did not have to bear the costs of proceedings. (Wilhelm 2001) asked whether EEOC procedures lead to different outcomes by class. Wilhelm hypothesized that because of budget constraints the EEOC did not pursue all claims with vigor so that claimants who had no resources to contribute were disadvantaged. Successful conciliations and settlements that require private resources in addition to EEOC efforts will have zero coefficients for women with the least resources and positive coefficients for those women with private resources. The sample included about 158,000 white women and 21,000 black in the 1980s and early 1990s.
A maximum liklihood estimate was made of separate wage equations for white and black women with four different levels of education (a proxy for resource availability). For example, one equation looks like this: Wages of black women with less than high school graduation = f (percent of claims that resulted in successful conciliation, settlement, withdrawal of charge with benefits, “no cause” determination, administrative closure). Other independent variables were marital status, MSA residence, central city residence, regions, state unemployment, employer size, and occupation. The coefficients were negative for black women with less than high school graduation and positive for white women with the same education. In other words, the greater the percentage of cases with some benefits to claimants, the lower the wages received, suggesting to Wilhelm than employers regarded the penalties so weak that they could take it out on the employees’ wages. Beneficial outcomes generally had positive coefficients for more highly educated white and black women. Wilhelm concludes, “EEOC is only helping those who could have helped themselves.” She recommends that the limited resources of EEOC only be used on the most disadvantages women.
Wilhelm refers to the claim outcomes as policy variables, but they are outcomes of a policy. She is not comparing performance with and without the EEOC or different degrees of enforcement by the EEOC, though that is a reasonable interpretation.
One contribution of heterodox theory here is to put questions of discrimination on the research agenda. The theory of perfect competition denies that any firm could discriminate and stay in business, so no empirical work has to be done. For a review of the empirical literature on this point see Mason (2000). Would different heterodox theories have specified a different model than that of Robinson? What would an institutional change model look like? Why did this particular informal institution reproduce itself even in the face of formal institutional change? Can employees pressure employers to discriminate against potential new employees that existing employees don’t like?
The monitoring of labor performance is a high information cost good. It is not cheap to relate effort, especially creative work, to pay. If monitoring were cheap, the right to hire and fire labor in auction markets would be adequate. Countries (such as Italy) that have created rights for workers related to security and training are being urged to “deregulate” to be globally competitive and increase the rate of innovation. It is argued that these rights constrain labor flexibility and mobility and reduce economic growth. Michie and Sheehan (2003) set out to test this prediction with a sample of UK firms. The dependent variable was the rate of innovation as reported by the firms. The independent explanatory variables included flexible work practices, human resource management techniques, and industrial relations systems, including the level of union membership. The authors claim, “The results suggest that ‘low road’ practices in the use of short-term and temporary contracts, a lack of employer commitment to job security, low levels of training, and so on—are negatively correlated with innovation. In contrast, it is found that ‘high road’ work practices—‘high commitment’ organization or ‘transformed’ workplaces—are positively correlated with innovation (138).” The implication is that if formal labor law goes in the direction of the labor auction model, it will not aid innovation. This research tests the effects of alternative institutions voluntarily chosen by different firms to suggest the impact of possible legal change.
Sticky prices over the business cycle is a widely accepted stylized fact that has been subject to a large empirical literature. Post Keynesian models use a normal cost instead of actual labor costs in econometric models explaining prices. These are obtained by dividing unit labor costs by trend productivity to incorporate demand pressure, a variable suggested by Keynesian theory. Downward (2001) revisits a historical debate on pricing dynamics in the United Kingdom. Testing for the levels of integration of price and cost time series, he argues that in general, the results support the conclusion that the long-run equilibrium consistent with the markup pricing hypothesis can be established between prices, material costs, and wage costs (340).
The debate on whether firms calculate prices to maximize profit or follow some other decision rule continues. If they calculate, prices would be very flexible. Econometric results in total have been mixed. In response, Blinder (1998) abandoned econometric inference of what managers consider and choose to interview 200 executives--“if people actually think the way one of these theories says, then they should be aware that they do …. Hence the idea: Why not ask them?(467).” Why not indeed! Blinder identified coordination failure, cost-based pricing, non-price competition, and implicit contracts as the winning theories. He tended to interpret his survey results from a profit-maximizing perspective nevertheless, though Downward and Lee (2001) insist that the results are more consistent with Post Keynesian theory.
In what sense is the econometric or survey research a test of the impact of alternative institutions? In the case of econometrics, the non-integration of the time series is consistent with the existence of some decision rules other than profit calculation. In the case of Blinder’s survey, we have some direct evidence of the decision rule. Are pricing rules institutions? Yes, if they represent informal routines and standard operating procedures. In order to construct a model where prices are a function of input prices and a dummy for calculation or a particular routine, we would need observations for some firms using informal institutions and other firms calculating. As it is, we know that certain routines are present that are in theory consistent with sticky prices, but no systematic test of the connection.
With respect to macro-economic phenomena, heterodox theories have much in common, but there are significant differences among Post Keynesian, Marxian, and social-structuralist views. Gordon (1998) provides one of the most extensive empirical tests of alternative heterodox theories in the literature (with contrast to several neoclassical models as well). Post Keynesian theory gives much attention to demand determinants while the Marxian model focuses on the dynamics of competition. Gordon calls his own extension “social-structuralist” and synthesizes demand determinants and class conflict. The emphasis is on the dynamics of accumulation and growth. The model has three behavioral equations explaining profitability, investment, and consumption (rather than saving). Profitability is determined by capacity utilization, monopoly power, competitive pressure and capitalist power as explained above in the section on profitability. The consumption function further distinguishes production and non-production workers and finds that distribution matters.
Gordon constructs numerous model variations of differing complexity to simulate and make ex post forecasts where the dependent variable is aggregate capacity utilization. The forecasting exercise uses data through 1978 to forecast the business cycle from 1979-88. The simulation uses data to estimate the model for the same period as the simulation. Performance of the different models measured by the root mean square % error and the simple correlation coefficient shows the heterodox models doing better than the benchmark models. The ex post forecast performance also favors the heterodox models. Gordon generally judged his own social-structuralist model as “quite promising,” but preliminary. His final sentence is sobering, “Nobody ever told me that putting heterodox macro to the test would be completed in a day (400).”
Gordon’s power variables are institutional variables that change over time as political regimes change. Bowles, Gordon and Weisskopf (1998) give the illustration of President Reagan’s attempt to improve corporate earnings “by raising the cost of job loss, improving the terms of trade, more vigorously flexing United States military power, reducing the intensity of government regulation, and dramatically reducing capital’s share of the total tax burden (223).” President Bush is pushing these institutional changes even further.
Do political rules make a difference in what everyday institutions of the economy emerge? In other words, do the rules for making rules affect whose interests count when the everyday property rights are made? Access to the rule making process is not unlike access to land, labor, credit or education. Some groups benefit by keeping others out. Access is incompatible among conflicting groups. Formal constitutional rules give some interests the right to form winning coalitions and defeat other contenders. For example, a rule of unanimity enshrines the status quo. No group can be forced to accept a change in everyday economic opportunities. If a majority rule is in place, the members of the majority coalition can defeat the minority and need not accommodate them in any way. Do those in the majority actually take advantage of this rule? Seeking to use the rules to maximize one’s interest might be called the “ rationalist theory” of decision-making. Forgoing one’s advantage suggests the existence of an informal institution or the learning of a new identity—a “constructivist theory.”
Lewis (2003: 97) asks, “What difference do institutional environments make” Do they primarily affect strategy, with constraining and enabling effects on behavior as rationalists hold? Or do they also affect attitudes, identities, and how interests are formulated as constructivists assert?” The case is that of the Committee of Permanent Representatives of the European Union (Coreper). While, the Committee is advisory to the Union ministers, they de facto make agreements that the ministers then formally endorse (rubber stamp). In 1994, the Committee was considering a Local Elections Directive--the right to vote and run for municipal elections in member countries. There were substantial differences in national interests with respect to sensitive political issues of electoral and citizenship laws if member states had to pass constitutional amendments to extend the right to non-national EU citizens. At the outset of discussion, about half of the member states wanted exceptions (derogations). For example, Luxembourg wanted an exception because it had an unusually high percentage of foreigners. Nevertheless, it acquiesced when it could not persuade other countries as to its rationale for special treatment. Belgium asked for an exception if foreign voters might upset delicate balances of local language groups. This was the only exception granted after seven weeks of negotiation.
A counter example is provided by the 1993 “Working Time Directive,” i.e., the establishment of a maximum daily and weekly rest period, and a minimum of four weeks paid vacation per year. Working time was proposed to the Committee under health and safety statutes and hence was subject to the qualified majority voting rule. Britain objected and said such regulation was not a health and safety matter but an employment issue that was covered by a EU article requiring application of the unanimity rule. Still they participated in the negotiations for two years. Why did the other countries bother? Britain won some concessions during negotiations and so did other countries as the directive spiraled down to the lowest common denominator. Still, Britain ultimately abstained and took the directive to the European Court of Justice. From interviews, the authors determined that there was an unwritten rule, “if we try to get you on board, you will meet us part way.” The authors note the “Janus-like nature of Coreper officials, who share a sense of responsibility in the collective decision-making process and the search for ‘fair’ solutions, which is in addition to representing national interests (120).” They further observe, “examples abound of delegations accepting compromise (even when they ‘had the votes’), finding other’s arguments persuasive…or just plain showing restraint in the kinds of arguments and demands they pushed for (120).” The authors believe they are observing a collective responsibility that “is a cognitive dimension of integration based on cathetic (rather than instrumental ones) (120).” They argue (121), “In this institutional environment, interests are ‘conditioned by a community standard that delimits the acceptable.’”
The informal rule prevailed in the case of the Local Elections Directive, but the formal rule dominated when the issues were more intense in the Working Time Directive. The Conservative government of John Major (following Margaret Thatcher) had a very public and symbolic position against social legislation. The unanimity rule insured the status quo that they preferred. In what sense is this research a test of alternative institutions? The research in effect asks whether informal norms are sometimes in place and supercede the formal alternative in place or is it always a matter of who can get what they want with the given formal rules? It is not a test of the performance associated with two different institutions in place in a cross-section of decision bodies or in a time series where the rules changed for a given organization.
In orthodox theories, people’s preferences and motives are assumed, so no data needs collection. In heterodox theories, researchers are willing to go further in looking for evidence of human cognition. Can we go further? It would be nice if we could say “institution X is in place here rather than institution Y, and then ask what difference it makes, rather than saying the performance data may be interpreted as consistent with institution X (an informal norm) being in place.
The utility of heterodox theories to formulate testable hypothesis will be part of the future of heterodox economics. A theory that helps specify an empirical model of dependent and independent variables (including contrasting institutions) that does a better job of explaining the dependent variable will have a lot going for it. At present, there is a lot of logical deduction from alternative orthodox and heterodox theories about the claimed benefits of one institution over another. In my opinion, this would be improved by putting the dependent variable in substantive terms of who gets what with alternative institutions rather than some overall welfare measure which is presumptive of whose interests count when interests conflict. And the debate would be raised to a higher level if there were more empirical testing of the substantive performance of alternative institutions in models containing alternative specifications of the relevant variables. Note I ask for the raising of debate and not that one theory drive out all others.
I hope that heterodox economists of all persuasions will call to my attention their favorite examples of empirical tests of the performance of alternative institution. Perhaps with a larger database we can begin to better understand which theories lead to better model specification for various kinds of problems and policy issues. Again, my e-mail is <email@example.com>
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[*] Paper prepared for a conference on The Future of Heterodox Economics, University of Missouri at Kansas City, June 5-7, 2003. I want to thank Lin Tauheed for an earlier discussion that helped shape this topic in my mind. Thanks also to Warren Samuels and Phil O’Hara.
 Phil O’Hara (personal communication, May 2, 2003) points out, “But surely a major part of heterodox analysis is that variables are co-determining, or multivariate analysis is important. In particular, what some people call dependent variables are often critical in the co-variant process. This multi-causal, interactive process is I think one of the major achievements of heterodoxy, and could well be a critique of most received empirical econometrics; or maybe it calls for a different form of econometrics? (Which may or may not exist.)
 At a different level of generalization, (Munkirs 1985) presents data on boards of directors interlocks between and among firms in what he calls the “centralized private sector planning core.” He is suspicious of this concentration of power, but does not attempt to relate differences in this interlock in cross section or in time to specific differences in performance.
 “Deregulation” is put in quotes because any regulation (institution) gives opportunity to some and exposures and obligations to others. If a rule giving security to workers is removed, it is a change in regulation that shifts rights between employees and employers. If there is order rather than chaos in the context of human interdependence, the only choice in institutions is who has the right and who has the exposure to that right. Rights can only be shifted; there is no alternative natural state where institutions are absent (Schmid 1999).
 Lin Tauheed (personal communication, May 11, 2003) says, “It seems to me unwise for Institutionalists to give up this conceptualization of strategy, and its relationship to constraints and enablements, to rationalists. This is particularly true since the work of Commons set the foundation for the connection of limiting (constraining) factors with the strategic and with their accompanying strategic transactions, and of complementary (enabling) factors with the routine transactions of institutions. As Commons’ psychology was “volitional” rather than rational, there is no need to cede strategic to rationalists. Commons expressly used the term “ ‘strategic’ referring to the volitional side [and] the word ‘limiting’ referring to the objective side” of a transaction (Institutional Economics, 1934, 89). Nor is there any need to cede the concepts of attitudes and interests to constructivists, as strategic and routine transactions occur within a framework of “conflict of interests”. Additionally, there are always complementary and limiting factors, which are replaced by others when current conflicts of interests are brought to a “reasonable (Commons) conclusion.”