Download The Limits of Design: Explaining Institutional Origins and Change

The Limits of Design: Explaining Institutional
Origins and Change
PAUL PIERSON*
Political scientists have paid much more attention to the effects of institutions than to issues of institutional origins and change. One result has been
a marked tendency to fall back on implicit or explicit functional accounts, in
which the effects of institutions explain the presence of those institutions.
Institutional effects may indeed provide part of such an explanation. Yet the
plausibility of functional accounts depends upon either a set of favorable
conditions at the design stage or the presence of environments conducive to
learning or competition. Exploring variability in the relevant social contexts makes it possible to both establish the restricted range of functional
accounts and specify some promising lines of inquiry into the subject of
institutional origins and change.
Institutions now stand at the heart of much theorizing and explanation in
political science. Analysts working from a variety of perspectives have
produced compelling work on the significance of institutional arrangements for political and social outcomes (Hall and Taylor 1996). By contrast, we have made far less progress in treating institutions as themselves
important objects of explanation. The origins of institutions, as well as the
sources of institutional change, remain quite opaque. As David Kreps has
observed, the sophisticated economic literature on the effects of institutions “leaves open the question, where did the institutions come from? . . .
Having a theory about how institutions arise and evolve could be more
informative than theories of equilibrium within the context of a given set
of institutions” (Kreps 1990, 530).
Perhaps the dominant response to this challenge in political science is
the resort (explicitly or implicitly) to functionalist reasoning: the explanation of institutional forms is to be found in their functional consequences
for those who create them. Such an approach, however, has serious shortcomings. The goal of this essay is to explore some of the limitations of
functionalist mechanisms of institutional development, and to use this
critique to point out some fruitful lines for theorizing about institutional
origins and change. The discussion is limited to formal political institutions, which are the products of conscious design and redesign.
*Harvard University
Governance: An International Journal of Policy and Administration, Vol. 13, No. 4, October 2000
(pp. 475–499). © 2000 Blackwell Publishers, 350 Main St., Malden MA 02148, USA, and 108
Cowley Road, Oxford, OX4 1JF, UK. ISSN 0952-1895
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The purpose, it should be emphasized, is not to deride functionalist
thinking. On the contrary, thinking in functionalist terms about an existing institution, policy, or social organization is one good way to derive
causal hypotheses about institutional origins and change. Functional
accounts, however, are far from being the only plausible ones. The task is
to identify alternative mechanisms of institutional origins and change,
and to begin to specify the conditions that make one or another account
more probable.
The argument proceeds in three stages. The first briefly outlines the
functionalist tendencies prominent in much of the work political scientists
have done on institutions. The second examines the reasons why one
might expect political actors to be only moderately prone to design functional institutions. The third considers at greater length two possible
mechanisms—learning and evolution—which might generate functional
institutions over time and discuss the limits of each. The conclusion elaborates some implications and offers suggestions for further research.
I. FUNCTIONALIST ARGUMENTS ABOUT INSTITUTIONS
Political scientists have had much more to say about institutional effects
than about institutional origins and change. Both a cause and consequence
of these lacunae has been a turn to functionalist reasoning. Although
frequently such reasoning is not explicitly stated, functionalist treatments
of institutions are prevalent in political science. They are common, for
instance, among those who emphasize the rational choices of individual
actors that underlie political activity, and the reasonably efficient nature
of collective responses to social needs. To take some prominent examples
from different subfields of the discipline: international regimes facilitate
agreements through issue linkage and the reduction of monitoring costs
(Keohane 1984); congressional committees prevent cycling (Shepsle 1986),
enable gains from “trade” among legislators with different priorities
(Weingast and Marshall 1988), or rationalize the flow of scarce information (Krehbiel 1991); the European Court of Justice offers a neutral monitoring and enforcement agency for the European Union’s member states
(Garrett 1995). These works vary in the extent to which they explicitly
address issues of institutional origins and change, but in each case one is
left with the impression that institutional functioning in large part explains
the presence of particular institutional arrangements.
Much of this theorizing builds on the new institutional economics,
especially Oliver Williamson’s work on transaction costs (Williamson
1975; Moe 1984). Williamson is quite explicit in arguing that the development of a particular organizational form can be explained as the result of
the efforts of rational actors to reduce transaction costs. More generally,
functionalist arguments take the following form: outcome X (an institution, policy, or organization, for instance) exists because it serves the function Y. This is not a crazy place for a social scientist interested in
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institutional formation to start. If actors are purposive, it will often be the
case that the effects of an institution have something—perhaps a lot—to
do with an explanation for its emergence, persistence, or change (Keohane
1984). The problem, however, is that much functionalist thinking in political science acts as an end-point rather than a starting point for analysis.
Functionalism offers an easy rationale for evading the thorny issues of
institutional emergence and change. Rather than directly examining these
topics, one simply begins with existing institutions. The assumption is
that these institutions exist in the form they do because they are functional
for social actors. The task of the analyst is to lay bare the particular function (generally, the resolution of some sort of collective choice problem)
the institution serves.
Given a reasonable amount of intellectual creativity and a moderately
flexible analytical tool kit, this task of unmasking functions often turns out
to be a fairly easy one. Rational choice analysts, for instance, possess just
such a tool kit, making it possible to reconcile virtually any observed outcome with a functionalist account (Green and Shapiro 1994). If such an
account is not readily at hand, one can introduce it by incorporating side
payments, or “nesting” one game inside another (e.g., Tsebelis 1990;
Lange 1993). Yet it is one thing to demonstrate (or, more often, speculate)
that an institution is “doing” something for social actors. It is quite
another thing to jump to the conclusion that this accounts for the institution’s presence. Such a functionalist logic requires one of two supporting
lines of argument: either functional institutions must be products of rational design, or they emerge over time through mechanisms of institutional
enhancement.
II. THE LIMITS OF RATIONAL DESIGN
A simple vision of institutional design focuses on the intentional and
far-sighted choices of purposive, instrumental actors. By this account,
institutional effects should be seen as the intended consequences of their
creators’ actions. Although most political scientists would probably reject
a strong form of this argument, it is often a hidden assumption in the analysis of institutions. In any event, exploring the potential pitfalls of such a
premise highlights some important challenges for a more sophisticated
approach to issues of institutional origins and change.
Each component of what might be termed the rational-instrumental
approach to institutions deserves serious interrogation. Actors may not be
instrumental in the sense implied by this framework. They may not be
far-sighted. Finally, institutional effects may not be intended. Each of these
dimensions exposes a possible limitation on the effectiveness of institutional design, and is therefore an important topic for further theoretical
and empirical investigation.
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Limitation 1. Institutional Designers May Not Act Instrumentally
Research on institutions often stresses or assumes the instrumental behavior of designers. Institutions are constructed along particular lines because
actors expect that particular features will produce specific consequences.
Features of institutions are believed to hold significance only to the extent
they help actors achieve their goals.
There is, however, a strong tradition in sociological theory, recently
consolidated in sociology’s version of “the new institutionalism,” that
challenges this premise (Meyer and Rowan 1977; March and Olson 1989;
Powell and DiMaggio 1991). In structuring institutional arrangements,
actors may be motivated more by conceptions of what is appropriate than
by conceptions of what would be effective. Peter Hall and Rosemary
Taylor summarize this line of argument as follows:
[M]any of the institutional forms and procedures used by modern organizations
were not adopted simply because they were most efficient for the tasks at hand,
in line with some transcendent “rationality.” Instead, they . . . should be seen as
culturally-specific practices, akin to the myths and ceremonies devised by many
societies, and assimilated into organizations, not necessarily to enhance their
formal means-end efficiency, but as a result of the kind of processes associated
with the transmission of cultural practices more generally (1996, 946–947).
Sociologists, for instance, have emphasized the pervasive diffusion of particular institutional forms, even in widely divergent contexts. Rather than
revealing the focus of actors on efficiency, they suggest that this “institutional isomorphism” reflects the sensitivity of actors to the need to legitimate their activities.
If institutional arrangements are adopted because they are perceived to
be appropriate, not because they serve a means-end instrumentality, then
such arrangements may actually be dysfunctional for the particular local
context. The extent to which such “logic of appropriateness” behavior
motivates institutional design remains controversial among sociologists.
At a minimum, however, they have marshaled considerable empirical
material casting doubt on the validity of assuming that institutional
designers, as a rule, are motivated exclusively or even predominantly by
instrumental concerns.
Limitation 2. The Problem of Short Time Horizons
A statement attributed to David Stockman, budget director during the
Reagan administration, is unusual among political decisionmakers only
for its candor. Asked by an adviser in 1981 to consider pension reforms to
combat Social Security’s severe long-term financing problems, Stockman
dismissed the idea out of hand, exclaiming that he had no interest in
wasting “a lot of political capital on some other guy’s problem in [the
year] 2010” (quoted in Greider 1982, 43).
The question of actors’ time horizons constitutes a central issue for analysts of institutional design. This problem is of particular relevance to
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political scientists. Long-term institutional consequences may be the
by-products of actions taken for short-term political reasons. The evolution of the congressional committee system in the USA—an important
institutional feature of contemporary American governance—is a good
example. As Kenneth Shepsle notes, Henry Clay and his supporters introduced the system to further their immediate goals without regard to
long-term consequences: “The lasting effects of this institutional innovation could hardly have been anticipated, much less desired, by Clay. They
were by-products (and proved to be the most enduring and important
products) of self-interested leadership behavior” (Shepsle 1989, 141). In
this case, the system’s long-term functioning was not the goal of the actors
who created it. By the same token, an explanation for the institution’s
creation cannot be derived from an analysis of its long-term effects.
Many of the implications of political decisions—especially complex
policy interventions or major institutional reforms—only play out in the
long run. Yet political actors, especially politicians, would often seem
most interested in the short-term consequences of their actions; long-term
effects may be heavily discounted. One major reason is the logic of electoral politics. John Maynard Keynes once noted that in the long run, we
are all dead; for politicians in democratic polities, electoral death can come
much faster. Because the decisions of voters, which determine political
success, are taken in the short run, elected officials may employ a high discount rate. They generally will pay attention to long-term consequences
only if these become politically salient, or when they have little reason to
fear short-term electoral retribution.
If politicians often have short time horizons, this has important implications for theories of institutional origins and change. Assume that the
crucial decisionmaker is a politician up for reelection in two years. In this
context, effects after the election cycle might not count for much. If political decisionmakers face many decisions where short-term and long-term
benefits of institutional choices diverge, and if their time horizons tend to
be short, this would seem to diminish the prospect that institutions will be
designed to achieve functional outcomes over the long term.
Political scientists are beginning to pay considerable attention to the
issue of time horizons. The efforts of rational choice theorists, who recognize the possible implications of short time horizons for their assumptions
about institutional origins, have been particularly significant. How, these
theorists ask, might the “shadow of the future” be made more relevant for
political actors making choices today? There are in fact two distinct but
related problems here: (1) Actors may have genuinely short time
horizons—that is, they lack incentives to think about the long term; and
(2) they may care about the future but for a variety of reasons believe they
cannot reliably influence it—in such cases, short-term considerations will
again predominate.
If time horizons can be lengthened, then a claim that the long-term consequences of institutions in some sense explain their origins becomes
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more plausible. In fashioning responses to this problem, rational choice
theorists have drawn heavily on earlier work in economics. Economic
actors would seem to confront similar problems related to time horizons,
but much of the literature produced by the “new institutional economics”
stresses how particular social arrangements can overcome these
difficulties.
The first response stresses that political actors will not focus exclusively
on immediate considerations if they are accountable to actors with longer
time horizons. If politicians are “agents” for “principals” (such as voters
or interest groups) who take a long view and can effectively monitor
politicians’ behavior, then the problem is effectively mitigated. Even the
politician interested only in winning the next election will need to give the
future its due.
Because of difficulties with this line of argument (discussed below),
theorists have also turned to more subtle claims to establish the relevance
of the long term for current decisionmakers. Thus a second line of argument involves the adoption of mechanisms of “credible commitment”
(North and Weingast 1989; Shepsle 1991; North 1993). Shepsle (1991, 246)
has summarized the key insight of this work: ”[T]he ability to commit
often (not always) expands one’s opportunity set, whereas the capacity to
exercise discretion—which includes the latitude to renege or behave
opportunistically—reduces it." The crucial problem here is what economists call “time inconsistency.” It may be rational for an actor to make an
agreement, but equally rational to subsequently break it. Since others will
recognize this danger, the initial bargain will not be possible.
In such contexts, which are common in social affairs, actors can make
beneficial long-term bargains if they can “tie their hands” (or those of
their successors), increasing the confidence of other participants that
agreements will not be exploited. Institutions can be designed to disable
discretion, making commitments credible and therefore lengthening the
relevant time horizons for all concerned. Douglas North and Barry
Weingast’s (1989) frequently invoked example concerns the ability of
British monarchs to increase their revenue-generating capacity by ceding significant authority over financial matters to Parliament, thereby
reducing the prospect that they would unilaterally renege on accumulated debts.
Recent research suggests that particular institutional designs (such as
independent central banks), empowering particular kinds of political
actors (e.g., bankers), may succeed in lengthening time horizons in politics
(Persson and Tabellini 1994). International relations scholars have developed similar arguments about the consequences of international regimes
for increasing the credibility of interstate bargaining and thereby lengthening the relevant time frame for decisionmakers. Galvanized by the
work of North, Weingast, and others, a new generation of rational choice
scholars is canvassing the political universe in search of “credible commitment” mechanisms.
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A final line of analysis has involved applications of overlapping generations models (Soskice, Bates and Epstein 1992; Bates and Shepsle 1997).
Political actors may be “short-lived,” occupying key decisionmaking positions for relatively brief periods of time. Yet the organizations within
which they act persist over extended periods of time, and are thus made
up of overlapping generations of short-lived actors. Often these actors are
embedded in career trajectories where advancement depends on adherence to organizational expectations. In such settings, organizational
designs may “transform the ambition for advancement within the institution into constraint, thereby generating enduring regularities in the
choices of individuals” (Soskice, Bates and Epstein 1992, 548). Similarly,
actors at the end of their careers may care only about the short term (e.g.,
party leaders placing priority on their immediate political prospects at the
expense of the long-term reputation of the party), but they may depend on
the support of younger actors further down in the organization. Because
these younger members are interested in the character of the party whose
leadership they will inherit in the future, they may make their support of
current leaders conditional on the attentiveness of the latter to long-term
considerations.
These last two strands of argument about the “shadow of the future”
are complementary. Arguments about overlapping generations may
explain why particular (collective) actors might care about the long term.
Arguments about credible commitment may account for how these actors
can successfully pursue these long-term considerations in contexts where
one might expect problems of time inconsistency to be overwhelming. To
be very convincing, in other words, both arguments (or some equivalent)
will need to be true. For the “shadow of the future” to matter, actors must
both care about the future and feel capable of influencing it.
That these arguments have real force seems unquestionable. Even a
brief examination of political life suggests that organizations and political
actors often do attend to the long term. Indeed, modern societies would be
inconceivable if this were not the case. Governments, for instance, do not
generally seek to maximize short-term revenue extraction by engaging in
systematic confiscation of private assets. Politicians do not vote themselves spectacular pay increases. Interest groups generally act as if they
care about their reputations—a long-term asset (Hansen 1991). Usually
they will not squander their future credibility by lying to legislators they
seek to influence.
In general, however, there are good reasons to expect that efforts to
lengthen time horizons are likely to prove less effective in politics than in
economics. The marketplace possesses some strong mechanisms for
lengthening time horizons. Crucially, the existence of property rights provides particular individuals with a clear entitlement to income streams
from particular assets, and therefore creates an incentive to attend to the
long-term value of those assets.
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The mechanisms operating in politics are generally far weaker. Especially problematic is the fact that each of the “time-lengthening” devices
discussed above relies heavily on the capacity of some actors to adequately assess the behavior of others in order to detect opportunistic
actions, and then to bring the guilty parties to heel. Yet such monitoring
behavior is often exceptionally difficult in politics. Indeed, as we shall see,
many of the biggest problems with efforts to “translate” functionalist
theories of institutional design originating in economics to politics stem
from the complexity and uncertainty that characterizes the political realm.
It is often very hard to establish accountability in political environments. Outcomes themselves are frequently difficult to measure. And, if
we believe that a system is not performing well, it is still more difficult to
determine which elements in these highly complex systems are responsible and what kinds of adjustments would lead to better results. There are
often long lags and complex causal chains connecting political actions to
political outcomes. The complexity of the goals of politics, and the loose
and diffuse links between actions and outcomes, render politics inherently ambiguous. As North has argued, “[P]olitical markets are far more
prone [than economic markets] to inefficiency. The reason is straightforward. It is extraordinarily difficult to measure what is being exchanged
in political markets and in consequence to enforce agreements” (1990b,
362).
Even if failures in politics are relatively apparent and the culpability of
“agents” can be established, efforts of principals to sanction their agents
may be difficult. Many participants in politics (voters, members of interest
groups) engage in activities only sporadically. Their tools of action are
often crude, such as the blunt instrument of the vote, and their actions
may have consequences only when aggregated with those of other actors
in circumstances where coordination is difficult or impossible.
Thus both monitoring and sanctioning difficulties place serious limitations on techniques for lengthening actors’ time horizons. It is no accident, for instance, that much of the generally optimistic rational choice
discussion of “credible commitments” in politics has focused on relatively transparent financial issues (e.g., budget deficits, monetary
policy). In these settings, performance indicators are clear and lines of
accountability are unambiguous. Hence, behavior is relatively easy to
monitor. While these issues are obviously important, it must be stressed
that for reasons already noted they are fundamentally atypical of the
kinds of matters dealt with in politics.
An additional limitation of these techniques for lengthening time horizons is particularly relevant for the specific issue of institutional design.
Even if some of the mechanisms discussed by rational choice theorists are
operative in everyday politics, they will often be especially fragile or
absent altogether precisely at moments of institutional formation. At
founding moments, when crucial new rules are put in place, one often
cannot count on the operation of well-instutionalized contexts to frame
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and structure the actions of political decisionmakers (Elster, Offe and
Preuss 1998).
My point is not that actors always have short time horizons, but that
they often do. Thus the issue of actor time horizons should be treated as a
variable with real implications for questions of institutional origins and
change, and therefore as a subject deserving serious study. Where we
would expect relatively short time horizons to be operative, functional
claims about institutional design become more suspect.
Limitation 3. Institutional Effects May Be Unanticipated
Even if institutional designers do act instrumentally, and do focus on
long-term effects, unanticipated consequences are likely to be widespread. Anyone engaged in empirical research in the social sciences
knows that the most instrumental and canny of actors still cannot hope to
anticipate adequately all the consequences of their actions. Institutions
may not be functional because designers make mistakes.
Unanticipated consequences are likely to be of particular significance
in modern polities. Over time industrial societies have become much
more differentiated, involving increased interactions among increasing
numbers of people. The historical process has been elegantly summarized
by Norbert Elias:
The network of human activities tends to become increasingly complex,
far-flung, and closely knit. More and more groups, and with them more and
more individuals, tend to become dependent on each other for their security and
the satisfaction of their needs which, for the greater part, surpass the comprehension of those involved. It is as if first thousands, then millions, then more and
more millions walked through this world with their hands and feet chained
together by invisible ties. No one is in charge. No one stands outside. Some want
to go this way, others that. They fall upon each other and, vanquishing or
defeated, still remain chained to each other (1956, 232).
The profound implications of increasing social complexity need to be
underlined. As the number of decisions made and the number of actors
involved grow, relations of interdependence—among actors, organizations, and institutions—expand geometrically. This growing complexity
has two distinct consequences. First, it generates problems of overload.
More prevalent and complex political activity places growing demands
on decisionmakers. In this context, time constraints, scarcities of information, and the need to delegate decisions may promote unanticipated
effects. The second consequence of social complexity is growing interaction effects: the tendency of initiatives to have important consequences
for realms outside those originally intended. As Garrett Hardin puts it,
“We can never do merely one thing” (1963, 79–80). Instead, we should
expect that social processes involving large numbers of actors in densely
institutionalized societies will almost always generate elaborate feedback
loops and significant interaction effects which decisionmakers cannot
hope to fully anticipate.
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Nor is it just that social contexts are extremely complex; the difficulties
are exacerbated by the fact that the abilities of individuals to draw inferences and judgments from their experiences have systematic biases.
Barbara Levitt and James March provide an excellent summary:
[I]ndividual human beings are not perfect statisticians. . . . They make systematic
errors in recording the events of history and in making inferences from them.
They overestimate the probability of events that actually occur and of events
that are available to attention because of their recency or saliency. They are
insensitive to sample size. They tend to overattribute events to the intentional
actions of individuals. They use simple linear and functional rules, associate
causality with spatial and temporal contiguity, and assume that big effects must
have big causes. These attributes of individuals as historians all lead to systematic biases in interpretation (1988, 323).
Thus, as a number of careful analysts have concluded, social activity—
even when undertaken by highly knowledgeable and instrumental actors
possessing long time horizons—should routinely give rise to significant
unintended effects (Hayek 1973; Hirsch 1977; Schelling 1978; Van Parijs
1982; Perrow 1984; Jervis 1997). Nor is there any reason to exempt the task
of institutional design from this general tendency. Two brief illustrative
examples may underscore the point, though most students of politics
would have no trouble generating many additional instances. The first
concerns the changing institutional position of state governments in the
United States (Riker 1955). Because approval of the American Constitution required state ratification, the interests of states received considerable
attention in the process of institutional design. The framers intended the
Senate to serve as a strong support of state interests. State legislatures
were to appoint senators, who were expected to serve as delegates representing states in the formation of policy. Over time, however, senators
seeking greater autonomy were able to gradually free themselves from
state oversight. By the early 1900s, the enactment of the Seventeenth
Amendment requiring popular election of senators only ratified the result
of a lengthy erosion of state legislative control.
The development of Canadian federalism provides another example
(Watts 1987). The designers of the Canadian federation sought a highly
centralized form of federalism—in part as a reaction to the ways in which
decentralization contributed to the horrors of the Civil War. Yet the
Canadian federation is now far less centralized than the American one.
Among the reasons: the Canadian federation left the provinces with sole
responsibility for many activities that were then considered trivial. With
the growing role of government in social policy and economic management, however, these responsibilities turned out to be of tremendous
importance.
The prevalence of unanticipated consequences raises a difficult challenge for social scientists—after all, if savvy social actors cannot anticipate
mistakes, what do social scientists have to offer? This is a very big topic.
The above discussion, however, points to two productive lines of
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investigation—both prominent in recent sociological research—which
seek to pin down the conditions where unintended consequences are
likely to be most significant. The first focuses on problems of cognition—
the ways in which we are systematically error-prone in our judgments of
the social world, in particular those related to questions of cause and
effect. For instance, since individuals tend to overweight the significance
of recent, highly visible events in their understandings of the social world,
we might hypothesize that institutional designers will systematically err
in focusing on dramatic “failures” in the immediate past.
A second line of analysis would focus on distinctive social contexts.
Social settings vary in the extent to which they are “tightly coupled,”
involving dense and intensive connections among multiple domains
(Perrow 1984; Jervis 1997). Such connections generate complexity and
multiply the number of consequences flowing from any single intervention. The prevalence of unintended consequences in institutional
design should stem in part from this aspect of social contexts.
In political science, however, the dominant response to the issue has
been avoidance. Better altogether if this problem could be made to go
away. There are four plausible ways of doing so; I discuss them in
ascending order of helpfulness. Often, the reaction of the analyst is to
treat unanticipated consequences, perhaps only implicitly, as an “error
term.” In practice this means to ignore the matter. But without at least
some further discussion, theorists cannot know how serious the issue is
that they are skirting. It would be nice to at least have some idea how big
the error term is. This is especially pressing since there seems good
reason to believe that it is rather large indeed.
A second option is to treat unintended effects as “noise” and to assume
that such effects will be randomly distributed and will therefore tend to
wash out, leaving the systematic, intended effects behind. For some problems and settings, this is a reasonable way to proceed. It makes a good
deal of sense, for instance, in studying certain aggregative social processes
involving very large and atomized populations, such as the stock market
or public opinion (Page and Shapiro 1992). However, it is a far less helpful
approach for the investigation of institutional design and reform. Here,
single unintended effects may be quite large. Furthermore, as I will
discuss below, if institutionalization is path-dependent, then we cannot
expect accidents to cancel out; instead, early accidents may be
self-reinforcing (Arthur 1994).
A third and more helpful option is to acknowledge the high potential
for unanticipated consequences and to argue that this itself constitutes a
crucial organizing principle of institutional design. As Robert Goodin
puts it, “Accidents happen: but the frequency and direction of accidents
can be significantly shaped by intentional interventions of social planners.
. . . Insofar as the social world is accident-prone, we might want to design
around the risk of accidents, seeking robust institutions that can withstand the various shocks that will inevitably befall them” (1996, 29). This
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is not simply a normative argument about how institutions “should” be
designed; the claim is that an awareness of the potential for unintended
consequences itself shapes the activities of institutional designers. More
broadly, the new institutional economics (and some of its political
offshoots) argue that uncertainty—both about the behavior of others and
about unforeseen contingencies—plays a major role in shaping the
optimal design of institutions. An efficient institution should be able to
absorb, or adapt to, the predictable (if unspecifiable) bumps in the road.
Yet while this line of argument helpfully incorporates unintended consequences into the discussion of institutional design, it does not directly
address the issue of how common such unintended outcomes will be. We
are still left wanting to know the extent to which accidents are likely to
lead institutions to function in ways at odds with the expectations of
designers. Nor does this general resort to “correction-prone” or adaptive
design specify what such a design might be, or how corrections can be
made in reaction to unanticipated consequences.
These concerns are addressed in a final response to the problem of
unintended consequences, which pushes the analysis away from a focus
on the capacities of institutional framers. This line of argument, not
inconsistent with those already discussed, suggests various selection
mechanisms that will squeeze unanticipated consequences out of institutional settings over time. Claims about mechanisms of institutional
enhancement are sufficiently interesting and important to warrant separate and extended discussion. I take them up in Section III.
That one’s attention shifts to such mechanisms, however, reflects the
evident limitations of institutional design. There are strong grounds for
challenging any presumption that institutional effects will reflect the
expectations and desires of institutional designers. Designers may not be
thinking primarily in instrumental terms; they may be thinking instrumentally, but be preoccupied by short-term considerations; or they may
simply make mistakes. Convincing treatments of institutional design
must take all these possibilities into account.
III. EMERGENT FUNCTIONALISM? EVALUATING MECHANISMS
OF INSTITUTIONAL ENHANCEMENT
If the preceding arguments have merit, then institutional effects cannot be
assumed to derive in a straightforward way from the intentions of
far-sighted, goal-oriented actors. Yet this is not enough to demonstrate
the limits of functionalist reasoning about institutions. A second line of
functionalist argument could accept the preceding criticisms of rational
institutional designers, while nonetheless asserting that functional institutional designs will result over time.
That economists have rarely worried about the possibilities of inefficient institutional outcomes stems less from a naïve faith in the capacities of human designers than from a confidence in the potential for
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institutional enhancement. Winter (1986, 244) terms this the “as if”
principle: given the presence of certain adaptive mechanisms, one can
act as if individuals were rational, highly knowledgeable, and instrumental actors, because the results over time will be the same. Markets,
economists argue, provide two powerful mechanisms for generating
efficiency: competition and learning. Competitive pressures in a market
society means that new organizations with more efficient structures will
develop, eventually replacing suboptimal organizations (Alchian 1950).
Learning processes within firms can also lead to correction. According
to Williamson, one can rely on
the “far-sighted propensity” or “rational spirit” that economics ascribes to
economic actors. . . . Once the unanticipated consequences are understood, these
effects will thereafter be anticipated and the ramifications can be folded back
into the organizational design. Unwanted costs will then be mitigated and
unanticipated benefits will be enhanced. Better economic performance will
ordinarily result (1993, 116–117).
I will leave aside the question of whether these economists are justified in
these confident assertions about economic organizations. For political
scientists, the issue is the relevance of these mechanisms to political
settings.
Each of these mechanisms can be seen as part of an evolutionary argument for the gradual refinement of institutional design. As Axelrod has
noted, “[T]he evolutionary approach is based on a simple principle: whatever is successful is likely to appear more often in the future” (1984, 169).
Competition and learning constitute two alternative mechanisms, akin
to Darwinian natural selection, which might account for the elegance
of institutional arrangements even in contexts marked by short time
horizons, unintended consequences, and so on.
Yet there are good reasons to believe that each of these mechanisms of
enhancement, while clearly important, is likely to be less effective when
one shifts from firms in private markets to the world of political institutions (Moe 1984; 1990). At a minimum, clear arguments need to be made
concerning the circumstances under which each mechanism is likely to
operate. Again, this is fruitful terrain for theoretical and empirical work.
The possible limitations of Williamson’s “rational spirit” in politics are
perhaps clearest for mechanisms of competition. Here one has to ask: Do
political institutions, like firms, confront a dense environment of competing institutions? Will competitors be able to capitalize on inefficient
performance, swooping in to carry off an institution’s “customers” and
drive it into bankruptcy? The answer is sometimes, but usually not.
Models of political competition are probably most helpful for understanding international relations, although the extent to which states have
needed to “rationalize or die” has varied considerably over time (Kahler
1999). Even in the harsh environment of early modern European state
formation, competition was not the only mechanism at work in selecting
survivors (Spruyt 1994). By contrast, the contemporary international
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environment offers far more extensive niches for weak and/or retrograde
state structures to survive. In democratic polities, party systems also
involve a clear competitive dynamic. One could argue with some justification that parties must adapt their organizations and platforms in the face
of such competition or confront the prospect of decline.
In general, however, there can be little doubt that political environments are typically more “permissive” than economic ones (Krasner
1989; Powell and DiMaggio 1991). Another way to put this is that “barriers to entry” are often extremely high. As has already been discussed,
poor performance in politics is not always easy to identify or attribute to
a particular source. Even where failure can be identified and attributed,
major difficulties arise if correction requires collective action in pursuit
of outcomes that have the characteristics of public goods (as is usually
the case in politics). In such settings, actors have to overcome very difficult coordination problems in order to generate an institutional competitor of the poorly performing institution.
In many cases, however, political institutions are not really subject to
direct competition at all.1 Instead, single institutional arrangements, or
sets of rules, often have a monopoly over a particular part of the political
terrain. Consider the two examples of political competition introduced
above. Competition occurs among nation-states, which are territorial
units, each of which contains a wide array of political institutions.
Electoral competition occurs among parties, all of which operate under
a single set of electoral rules. Thus, while political parties and
nation-states face competition, it is not clear that the notion of competition between electoral institutions is a meaningful one. Thus, where
competition operates in politics, it often operates “above” (interstate
conflict) or “below" (among contending organizations) the level of institutions. At a minimum, analysts would need to carefully specify the
conditions for competitive pressures to generate institutional efficiencies. In practice, such conditions are generally going to be absent or
weak in nonmarket settings.
More detailed discussion is probably warranted for the issue of learning. Again, however, there are reasons to doubt that learning dynamics
will generally provide a reliable mechanism for institutional enhancement. The central reason is the intense complexity and ambiguity of the
political world. Although this issue has already been discussed, a brief
contrast with economics may be helpful in clarifying the difficulties
confronting learning-based mechanisms of institutional enhancement.
Economics is built in large part around the useful and plausible
assumption that actors seek to optimize and are relatively good at it.
Firms operate to maximize profits. The metric for good performance is relatively simple and transparent. Prices send strong signals which facilitate
comparisons. One can analyze how various features of the economic environment contribute to or detract from firm performance. Observable,
unambiguous, and often quantifiable indicators exist for many of these
THE LIMITS OF DESIGN
489
features. Workers can easily obtain fairly good information on the wages
and working conditions on offer from different firms. Consumers, too, are
reasonably adept at navigating most aspects of the economic world. Links
between choices and outcomes are generally clear: I take a new job and
my income rises; I buy a car and my savings account balance shrinks. The
quality of goods is generally evident in relatively short order, and
repeated purchases allow consumers to sample alternatives.
Of course, one could add many complications to this simple picture of
the economic realm. The market is obviously highly complex and often
confusing. Yet the central clarifying role of prices, the prevalence of
repeated interactions, the absence of a need to coordinate many of one’s
economic decisions with those of other actors, and the presence of relatively short causal chains between choices and results make it comparatively easy for economic actors to correct mistakes over time. In other
words, these features improve the prospects for learning.
By contrast, politics lacks anything like the measuring rod of price,
despite some reductionist efforts to make the search for votes the equivalent of the search for dollars. Political actors frequently pursue a range of
goals. While politicians often will be focused on reelection, others (e.g.,
bureaucrats, interest groups) have different ambitions. Thus, it is difficult
to say what an “effective” political system would look like—what it
would optimize—even in theory. Political activity is often intermittent
rather than regularly repeated. Causal chains between actions and outcomes are often very long. Politics is simply a far, far murkier environment. This murkiness exacerbates the limitations of human cognition
considered in the earlier discussion of unintended consequences.
In part because of this opacity, even mistaken understandings of the
political world are often self-reinforcing rather than corrective. To introduce a concept explored in depth below, our basic conceptions of the
political world, of what works and what does not, tend to be “path
dependent.” As Douglass North (drawing on research in both cognitive
psychology and organizational theory) has argued, actors operating in
contexts of high complexity and opacity are heavily biased in the way
they filter information into existing “mental maps” (North 1990b; Denzau
and North 1994). Confirming information tends to be incorporated, while
disconfirming information is filtered out. Social interpretations of
complex environments like politics are subject to positive feedback.
North’s work here converges with the long-standing views of those
studying political culture as well as with the recent contributions of cognitive science and organization theory. Once established, basic outlooks on
politics, ranging from ideologies to either understandings of particular
aspects of governments or orientations toward political groups or parties,
are generally tenacious.
Complexity of context and limits of human cognition mean that mistaken understandings in politics often do not get corrected. It may be
appropriate in some circumstances to argue that politics involves learning
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processes, in which responses to public problems proceed in a
trial-and-error fashion (Lindblom 1959; Heclo 1974; Hall 1993). There is
little reason, however, to think that this acts as a selection mechanism with
anything like the efficiency-enhancing properties of market competition
in economics or Darwinian natural selection in biology. Because political
reality is so complex and the tasks of evaluating public performance and
determining which options would be superior are so formidable, such
self-correction is often limited.
My point is not that competition and learning are implausible mechanisms of institutional enhancement. On the contrary, it would be hard to
deny that political institutions may be modified and enhanced through
each of these processes. Rather, the point is that each of these mechanisms
exhibits considerable limitations in the political world. Thus, any tendency toward “evolved functionalism” should be treated as a variable.
Instead of assuming the efficacy of such mechanisms, political scientists
should engage in sustained investigation of the circumstances under
which they can be expected to operate reasonably well.
Yet formidable as these limitations of enhancement mechanisms may
be, the problems do not stop there. In addition to this “internal” critique
of evolutionary arguments, one needs to consider an external critique.
Assume for a moment that competitive pressures are significant, or
learning is considerable. Does it follow that institutional refinement
must result? The answer is no. Even where these mechanisms are clearly
operative, they face additional hurdles: in Williamson’s words, learning
or competitive pressures must still be “folded back into the organizational design.” Here, two fundamental obstacles to institutional correction need to be considered: institutional stickiness and path
dependence. These obstacles operate even in contexts where learning
effects and/or competitive pressures may be significant.
Institutional “Stickiness” in Politics
Institutional arrangements in politics are typically hard to change. Again,
the greater adaptability of the economic organizations studied by
Williamson offers a useful point of comparison. An individual with a new
idea for a product need only secure the finance to put it on the market. If
enough consumers (choosing independently) find it sufficiently appealing, the product will be a success. Change can be engineered through
competition against existing products. Similarly, those with property
rights over a firm are generally in a relatively strong position to remake
their organizations as they choose. Lines of authority are clear, and the
relevant decisionmakers are likely to share the same broad goal of maximizing profits.
By contrast, formal political institutions are usually change-resistant.
As Robert Goodin puts it, stability and predictability are achieved
through “a system of ‘nested rules,’ with rules at each successive level in
THE LIMITS OF DESIGN
491
the hierarchy being increasingly costly to change” (1996, 23). Thus, in
many national settings “nested rules” created by ordinary legislation
must pass through multiple veto points, often requiring broad
supermajorities. In other political settings, such as the European Union,
hurdles to change are even greater. And in most polities, efforts to change
rules higher in the hierarchy (e.g., constitutions) require even greater
levels of consensus. Indeed, many constitutions effectively prohibit—
short of a revolutionary rejection of the existing regime—certain types of
revision altogether (e.g., by providing veto power to those who would
lose protections or privileges as a result of possible reforms).
There are two broad reasons political institutions are usually designed
to be change resistant, each of which has already been discussed. First, in
many cases, designers seek to constrain themselves. The key insight of the
“credible commitments” literature is that actors can often do better if
they remove certain alternatives from their future menu of options. Like
Ulysses preparing for the Sirens, political actors often bind themselves,
restricting their own freedom in order to achieve some greater goal.
Second, and probably more important, those who design institutions
and policies may wish to bind their successors. Terry Moe terms this the
problem of “political uncertainty" (Moe 1990). Unlike economic actors,
political actors lack property rights. Designers know that continuous control over institutions is unlikely. This lack of continuous control has implications both for how institutions are designed and for the prospect of
changing institutions once they are created. In particular, those designing
institutions must consider the possibility that their political rivals will one
day be in power, and will be eager to overturn their designs, or to turn the
institutions they create to other purposes. To protect themselves, these
actors therefore create rules that make preexisting arrangements hard to
reverse. As Moe puts it, designers
do not want “their” agencies to fall under the control of opponents. And given
the way public authority is allocated and exercised in a democracy, they often
can only shut out their opponents by shutting themselves out too. In many cases,
then, they purposely create structures that even they cannot control (1990, 125).
This is, of course, perfectly sensible. Confronting the twin problems of
time inconsistency and political uncertainty, designers may reasonably
decide to make political institutions change-resistant. Nonetheless, this
characteristic of political institutions has clear implications for functional
explanations grounded in processes of institutional enhancement. When
actors at a later time attempt to make institutional reforms, they will often
face considerable obstacles.
The Consequences of Path Dependence
It is not just that institutional arrangements may make a reversal of
course difficult. Individual and organizational adaptations to previous
arrangements may also make reversal unattractive. When actors adapt
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to the new rules of the game by making extensive commitments based
on the expectation that these rules will continue, previous actions may
“lock in” options that actors would not now choose to initiate. Put
another way, social adaptation to institutions drastically increases the
cost of exit from existing arrangements. Rather than reflecting the benefits of institutionalized exchange, institutional continuity may reflect
the rising costs over time of adopting previously available alternatives
(Pierson 2000).
Recent work on path dependence has emphasized how initial institutional decisions—even suboptimal ones—can become self-reinforcing
over time (Krasner 1989; North 1990a). These initial choices encourage the
emergence of elaborate social and economic networks, greatly increasing
the cost of adopting once-possible alternatives and therefore inhibiting
exit. Major institutional arrangements have major social consequences.
Individuals make important commitments in response to these institutions. These commitments, in turn, may vastly increase the disruption
caused by institutional reforms, effectively “locking in” previous
decisions.
Research on technological change has revealed some of the circumstances conducive to path dependence (David 1985; Arthur 1994). The
crucial factor is the presence of increasing returns or positive feedback,
which encourages actors to focus on a single alternative and to continue
movement down a particular path once initial steps are taken. Large set-up
or fixed costs are likely to create increasing returns to further investment
in a given technology, providing individuals with a strong incentive
to identify and stick with a single option. Substantial learning effects
connected to the operation of complex systems provide an additional
source of increasing returns. Coordination effects (or network externalities)
occur when the individual receives increased benefits from a particular
activity if others also adopt the same option. Finally, adaptive expectations
occur when individuals feel a need to “pick the right horse” because
options that fail to win broad acceptance will have drawbacks later on.
Under these conditions, individual expectations about usage patterns
may become self-fulfilling.
As North has argued, all of these arguments can be extended from
studies of technological change to other social processes, particularly
to the development of institutions. In contexts of complex social interdependence, new institutions often entail high fixed or start-up costs,
may involve considerable learning effects, and generate coordination
effects and adaptive expectations. Established institutions create powerful inducements which reinforce their own stability and further
development. “In short,” North concludes, “the interdependent web of
an institutional matrix produces massive increasing returns,” making
path dependence a common feature of institutional evolution (1990a,
95).
THE LIMITS OF DESIGN
493
Lock-in arguments have received little attention within political science, in part because these processes have a tendency to depoliticize
issues. By accelerating the momentum behind one path, they render
previously viable alternatives implausible. The result is often not the kind
of open conflict over alternatives that political scientists would quickly
identify, but the absence of conflict. Lock-in leads to what Peter Bachrach
and Morton Baratz (1962) called “non-decisions.” This aspect of politics
can probably be identified only through careful, theoretically grounded
historical investigation of how social adaptations to institutional and policy constraints alter the context for future decisionmaking (Hacker 1998).
Over time, as social actors make commitments based on existing institutions, the cost of “exit” rises. Williamson’s confident assertion that
learning allows firms to adjust to unanticipated consequences applies far
less well to an analysis of politics, and especially to the study of formal
political institutions. Learning from past events may lead actors to act differently in launching new initiatives. Recapturing ground in previously
institutionalized fields of activity, however, will often be quite difficult.
Actors do not inherit a blank slate that they can remake at will when their
preferences shift or unintended consequences become visible. Instead,
actors find that the dead weight of previous institutional choices seriously
limits their room to maneuver. Previous institutional choices may be
sticky, and they may be path dependent. Thus, even if learning and competitive mechanisms are present, it is far from self-evident that these pressures will translate into institutional enhancement.
IV. SOME NEXT STEPS
This essay has advanced two core arguments: (1) Functionalist premises
about institutional origins and change should be replaced by functionalist
hypotheses; and (2) functionalist hypotheses should be supplemented and
contrasted with hypotheses stressing the possible nonfunctionalist roots
of institutions. We should expect the prevalence of functional outcomes in
the construction and reconstruction of political institutions to be highly
variable. More subtle theories of institutional origins and change must be
built around careful argument about the preconditions for functional outcomes to occur. This requires specification of where such claims might
break down and the circumstances that make the presence of such unfavorable conditions more or less likely.
Rather than assuming that institutions originate and change to meet
functional requirements, we need to make this a target for investigation.
This is wide open terrain for systematic research. It may be true, as Richard Nixon said of Keynesianism, that we are all institutionalists now. Yet
political scientists have produced very little sustained empirical work,
organized around clear competing hypotheses, comparing institutional
origins and change across different settings. Without this research, we are
in no position to evaluate the impact of particular contextual features on
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institutional outcomes, or even to establish how prevalent such features
are in the political world. The contrast with sociology, where there is a
thriving tradition of theoretically informed empirical research on related
topics, is striking (Clemens 1999).
It is worth stressing two common threads in many of the arguments
advanced in this essay. The first is the major contribution of sociological
research to an understanding of functionalism’s limitations. Whether the
issue is the noninstrumental behavior of actors, the limits of learning or
competitive processes of institutional enhancement, or the cognitive and
social sources of unintended consequences, sociologists have had a lot of
interesting things to say. Political scientists should continue to borrow
insights from other disciplines, with appropriate modifications. In doing
so, however, greater attention could well be paid to recent theoretical and
empirical work in sociology.
The second common theme linking the various issues discussed is that
all of them require that we look closely at the intertemporal aspects of
politics, rather than take a “snapshot” view of political processes and outcomes. To see where functional accounts might come up short one needs
to look not just at the moment of institutional origins, or at a current institution (deducing origins from current functioning). Instead, one must
consider dynamic processes that can highlight the implications of short
time horizons, the scope of unintended consequences, the emergence of
path dependence, and the efficacy or limitations of learning and competitive mechanisms. This requires genuinely historical research. By genuinely
historical research I mean work that carefully investigates processes
unfolding over time. This work needs to be distinguished from efforts to
mine history for illustrations of essentially static deductive arguments.
The application of tribal labels is too widespread in American political
science, but one could see the line of argumentation I am recommending
as a variant of “historical institutionalism” (Hall and Taylor 1996). It rests
on the basic premise that the explanation of many aspects of politics
requires diachronic as well as synchronic analysis.
Highlighting the benefits of more sociological and genuinely historical
work implies that the new institutional economics is unlikely to provide
sufficient basis for theories of institutional origins and change in politics.
Indeed, I have stressed throughout that efforts to translate theoretical
arguments from the economic realm to the political one are more perilous
than is often recognized. Such translations need to be done with care, and
with an appreciation for the limits of the analogy. This is not to dismiss the
“new institutional economics” and its rational choice offshoots in political
science. These lines of inquiry have generated important insights, particularly through a partial but significant effort to show how various obstacles
to functional dynamics might be overcome.2
To emphasize both insights and limitations is not to advocate that we
“split the difference” among alternative approaches. It is to recognize that
distinct bodies of theory may provide greater leverage for analyzing
THE LIMITS OF DESIGN
495
particular contexts and dynamics. As Jepperson (1996) has put it, seemingly antagonistic “theoretical imageries” may sometimes (but only sometimes) be more complementary and less competitive than we realize. They
may cover different aspects of processes, with different theories contributing “modules” that can potentially be linked to produce more complete
accounts (Scharpf 1997). They may be discussing discrete phenomena.
They may possess poorly articulated boundary conditions (x will hold
under conditions a, b, and c, but y will hold under conditions d, e, and f).
Such would seem to be the case here. Figure 1 summarizes my discussion, presenting conditions that make functionalist outcomes more or less
likely. Two broad contexts are more favorable to functionalist accounts.
The first is where conditions are such that we can expect initial designers
to behave instrumentally, to focus on long-term institutional effects, and
to be relatively accurate in their projections concerning those effects. The
second context is where learning and/or competitive mechanisms are
strong and obstacles to reform stemming from path dependence and institutional veto-points are modest.
FIGURE 1
Social Context and Functionalist Explanations
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I would not suggest that circumstances where these various combinations of favorable conditions hold will be rare in politics; indeed, they are
probably fairly common. On the other hand, it seems highly unlikely that
they would be so common that theorists could safely operate from functionalist premises. Functional explanations of institutional origins and
change are not wrong-headed, but they are radically incomplete. As a consequence, they suggest a world of political institutions that is far more
prone to efficiency and continuous refinement, far less encumbered by the
preoccupations and mistakes of the past, than the world we actually
inhabit.
Acknowledgments
I am grateful for the support of the John Simon Guggenheim Foundation
and the European University Institute’s Robert Schuman Center. Alan
Jacobs offered very helpful comments on an earlier draft. Andrew
Rudalevige, Effi Tomaras, and Jeremy Weinstein provided valuable
research assistance.
Notes
1.
2.
Thanks to Alan Jacobs for suggesting this line of argumentation.
Again, the target of my criticisms in this essay is loose functionalist explanations of institutional origins and change. While I stress that many rational
choice analyses fall into this pattern, Gary Miller quite rightly notes in his
thoughtful commentary in this issue that they need not do so. Like Miller, I
do not believe that analysts face an either/or choice between rational choice
and some alternative(s). Indeed, some of my own analysis (e.g., the discussion of path dependence) draws heavily on rational choice theory. Yet it
remains the case that rational choice theorists have focused primarily on the
effects of extant institutions. By contrast, many of the dimensions of social
processes relevant to a discussion of institutional origins and change have
received limited attention. Randall Calvert, for instance, acknowledges that
“the institutions-as-equilibria approach . . . says nothing directly about the
emergence of institutions” (1995, 80). As Jack Knight (1995, 111) has argued,
theories of institutional dynamics, including those grounded in rational
choice, turn in part on “different claims about the actual empirical conditions under which social institutions emerge and change.” How much uncertainty do actors face in different contexts? How long are actors’ time
horizons? How difficult is it to detect and correct institutional failures? How
competitive is a particular institutional environment? Analysts studying
these crucial issues can usefully draw on bodies of theory outside of rational
choice traditions.
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