The Theory of Institutional Change Revisited: The Institutional Dichotomy, Its Dynamic, and Policy Implications in a More Formal Analysis

The original institutionalist theory of institutional change as elaborated by Paul D. Bush (1987) in the traditions of Veblen, Ayres and J.F. Foster (called here the VAFB-paradigm), provides a most important theoretical and empirical device for critical institutional analysis, with its clarification of the value base and of different forms and dynamics of value-behavior patterns. Bush’s paper was certainly one of the most important ones in Institutionalism. The Theory of Institutional Change pushed Institutionalism to a certain limit by elaborating its logical relations and systems that have been underexplored for so long. Coming from different ‘galaxies’, established formal approaches and methods, such as system dynamics, econometrics, network analysis, graph theory, or game theory—in fact, often applied only bluntly in the mainstream—have been interpreted, developed and applied by institutional and evolutionary economists in an evolutionary-institutionalist perspective in recent decades. However, a theoretical and methodological gap somehow still existed until recently that those practicing institutionalists had to deal with. This gap seems to become closed in different areas (such as the Theory of Institutional Change or the Social Fabric Matrix Approach) currently. This paper tries to demonstrate that careful proper interpretations allow, in a ‘dialectical’ process, to bridge the remaining gap and reveal surprising equivalences and complementarities with resulting synergies for the future. The example here is the mutual approximation of the VAFB-paradigm and evolutionary-institutionally interpreted game theory, called the EIGT-paradigm here. Should such bridge-building be corroborated in the near future, Institutionalism would be enabled to cut across traditional and long lasting boundaries with respect to deeper both empirical and logical analysis. This might turn out to be a historical project of the extension of Institutionalism’s reach. The particular asymmetry of the logics of instrumental vs. ceremonial warrants explains a general dominance of the ceremonial. The forms of change of institutional value-behavior structures derived are (1) (reinforced) ‘ceremonial encapsulation’, (2) regressive institutional change and (3) progressive institutional change. In the cases (2) and (3), the degree of ceremonial dominance will have to increase (decrease) and the system’s ‘permissiveness’ to decrease (increase). The conceptualization of institutions, the asymmetric schematization of value-behavior-structures, the reason for ceremonial dominance, and the possibility of progressive institutional change will be reconsidered and compared in this paper using a game-theoretic perspective, with its basically instrumental comprehension of institutions and with the ceremonial warrant comprehensible only as a degeneration of the instrumental. We refer to a most simple social dilemma interaction structure and a supergame solution. Surprising equivalences and complementarities emerge, with potentials of cross-fertilization. An initially instrumental institution is considered to develop (in fact degenerate), together with (1) the emergence, or reproduction, of status and power differentials in hierarchical systems, and (2) the striving for easy, smooth, and cheap decision-making, or ‘economies of scale’ of decision-making, first into a still instrumental norm and eventually into a ceremonial or abstract norm. The latter takes place, when original conditions have changed but the institutional structure will not properly adapt because of the two motives of status gain and economies of scale of institutionalized decision-making. In a game-theoretical perspective, ceremonial dominance and ceremonial encapsulation preventing a new progressive institutional change would translate into an insufficient new collective action capacity, due to (1) habituation, (2) an insufficient incentive structure and (3) a neglect of the common future. The conclusion of the critical role of policy to initiate, accelerate, and stabilize progressive institutional change is shared in the original institutionalist and the game-theoretic perspectives as well. A well-defined institutional policy approach, inferable in some detail from the game-theoretic logic, may initiate a lock-out of ceremonial encapsulation, through a change of the incentive structure and an increase of the importance and awareness of interdependence and a common future. The public agent must be capable of ‘meritorizing’ the private-interaction outcomes through a negotiated, participatory social process. Thus, the public agent would interact with the interaction system of the private agents in a well-defined way, i.e., ‘institutional policy’ as a double interactive policy. In all, large potentials for cross-fertilization of institutionalism and game theory.