Customer Reviews

Institutions and Social Conflict (Political Economy of Institutions and Decisions)

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This book presents an interesting thesis that the author believes has been entirely overlooked by others writing in Institutional Economics. His thesis is that social institutions can best be explained as the outcome of social conflict among rational actors seeking to maximize their utility (benefits) in the form of distributional advantages over others.

Traditionally, social institutions have been explained by referring to the collective benefits they provide to society. But the author argues that while some institutions are necessary to coordinate activity, there are many ways to structure institutions to accomplish certain aims. The real question is why some institutions have developed rather than others. The author concludes that an explanation can be found only in the different distributional consequences alternative instiutions provide.

I really thought I was going to enjoy this book. The literature on New Institutional Economics is great because in presenting their theses, the authors also survey the existing literature on the subject. This book did this in the beginning, but the argument became a bit weak and tedious toward the end. His chapter on spontaneous emergence turned out to be a bit weak, much as I was looking forward to reading it, and his long chapter on the theory of social conflict was really just a restatement of some of the arguments contained in the introduction.

The argument in this book is really fascinating, and one that should be explored further by others. But the execution and writing of this book turned out to be a bit weak.

Knight applies a rational choice approach to explain how social institutions emerge and change. He contends that social institutions emerge as the result of social conflict between actors with differing interest and power asymmetries. As such, the gains from interaction between players are not equitably distributed. According to Knight, social institutions are a way for "some to constrain the actions of others with whom they interact" (19). Institutional development stems from the on-going social conflict between actors with competing interests. The motivation behind social institutions is not social efficiency, Pareto optimality, stability, or any other collective benefit. Social outcomes results from institutional rules reflect the self-interested motivations of individuals. Individuals will seek institutional structures that best serve their strategic interest. As such, we need to "look to the distributional consequences of those institutions" in order to decipher their origins. So, actors create institutions to gain strategic advantage in interactions. The question becomes, how did such actors gain this power to create the institutions most conducive to their strategic interests? Knight contends that the explanation stems from asymmetries over resources which in turn leads to asymmetries in bargaining power.
Social outcomes are the result of interdependent action. In order for a strategic actor to make choices in pursuit of his maximized utility, he must be able to form expectations regarding the behavior of others. These expectations are formed by institutions in that they provide information and sanctions. Once expectations are formed regarding the behavior of others, the strategic actor can select strategies that he feels will maximize his utility. This implies that institutions shape future behavior and that information and sanctions constrain the choices of the interacting players.
Knight writes, "Put simply, if self-interested actors want institutional arrangements that favor them as individuals, they will prefer institutional rules that constrain the actions of others with whom they interact. That is, they will want to structure the choices of others in such a way as to produce social outcomes that give them distributional advantage" (164).
Knight's origins for institutions stems first from the informal norms and rules that reflect existing power asymmetries in society. These interactions are governed by asymmetries in resources between players. We can think of a strong player (A) and a weaker player (B). Player (A) can create institutions that constrain their future choices. If these constraints are credible, it limits the subsequent choices of the weaker player (B) to those that are preferable to (A). Additionally, because (A) has less to lose from a breakdown in coordination they are less willing to negotiate towards a more equitable equilibrium. (A) is able to have longer time horizons than (B). Furthermore, (A) may have power to credibly threaten (B) to select the equilibrium which (A) prefers.
In short, it becomes rational for (B) to follow the rules posed by (A) because in doing so, (B) attains the most benefits it can hope to achieve. So what we see is the formation of institutions stemming from micro-interactions.
The next step, once the actors achieve a credible equilibrium is to institutionalize these rules, "generalizing these constraints as rules governing the community as a whole" (139-140). This occurs when the "social actors recognize that the committed strategies have become socially anticipated action and realize that compliance with them is their best response to the actions of others" (140).
We see (1) distributional inequalities emerging as a consequence of informal rules, (2) which in turn leads to systematic asymmetries of power, which (3) becomes institutionalized through "a network of common and repeated social interactions" (145).
Changes occur when asymmetries of power change. This could be from exogenous shocks to the system, unexpected distributional effects in the long-term, changes in actors bargaining power, etc.