N. Schofield et al.: Advances in Political Economy. Institutions, Modelling and Political Analysis, Springer, Heidelberg, 2013.
1- Introduction
During
the mid-eighties, Matthews (1986) affirmed in his presidential address to the
Royal Economic Society that the economics of institutions had become one of the
liveliest areas in economics. Two years prior to that, March and Olsen (1984)
stated “a new institutionalism has appeared in political science” and that “it
is far from coherent or consistent; it is not completely legitimate; but
neither can it be entirely ignored”. Although sociology had been less
responsive than political science, this was quickly changing, and the new
institutionalism also became incorporated into sociology (Brinton and Nee, 1998).
There
has been a considerable and notable increase in research on institutions since
then. The different social
sciences have begun to assume that “institutions matter” and that they can be
analyzed and therefore there has been an ongoing research effort both at the
theoretical and applied levels on the subject of notion, role and change in
institutions. The New
Institutional Economics (NIE) has been developed in economic science, based on the
contributions of authors such as Ronald Coase, Douglass North, Oliver
Williamson and Elinor Ostrom. In as far as political science is concerned, the
literature of the new institutionalism includes political scientists such as Guy
Peters, Johan Olsen, Peter Hall, Kenneth Shepsle and Barry Weingast. The new
institutionalism in sociology is part of this emerging paradigm in the social
sciences, and it includes the contributions of authors such as Paul Dimaggio, Walter
Powell and Victor Nee, among others.
Thus,
the “return of institutions” to the main research agenda has become
unquestionable in the social sciences, and the focus on institutions as a
foundation concept in social sciences has given rise to a variety of new
institutionalist approaches (Nee, 20005). This has provided a strong impetus to
political economy based on new theoretical foundations thereby boosting interdisciplinary
relations among the social sciences. This modern political economy of institutions has
included relevant advances in issues such as modeling the authoritarian regimes
(Schofield and Levinson, 2008), the study of social orders (Schofield, 2010) or
the utilization of a higher dimensional policy space in the analysis of
different political situations (Schofield et al, 2011), among others.
The
different institutional arrangements have systematic effects on policy-making
(Haggard and McCubbins, 2001). But if we want to have a deeper understanding of
the relationships between institutions and policy, we should view public
policies as the outcome of political transactions made over time (Spiller and
Tommasi, 2007). Political life is characterized by exchanges, agreements and
transactions, which frequently are only an attempt, therefore transaction
analysis is a fundamental step for studying political interaction and
institutions of governance.
The notion of transaction costs was the key concept
that the NIE used to understand how institutions affected efficiency in
economy. Coase (1937, 1960) enabled the justification of the importance of
institutions and organisations for the economic mainstream and furthermore, the
notion of transaction costs surpassed the limits of economic relationships.
“Modifying the standard rational choice model by incorporating transaction cost
theory into it can substantially increase the explanatory power of the model”
of political markets (North, 1990b, p. 355). In this manner, the new
transactional institutionalism has dealt with the study of political institutions
and processes through the Transaction Cost Politics research program (TCP)
carried out over the past twenty years (Weingast and Marshall, 1988; North, 1990b;
Dixit, 1996, 2003; Epstein and O´Halloran, 1999; Williamson, 1999; Spiller and
Tommasi, 2003, 2007).
TCP uses political transaction as the unit of
analysis, and explains the evolution of political relationships in their
condition as transactions and contracts, thereby highlighting the relevance of
institutions in political markets, which are characterized by incomplete
political rights, imperfect enforcement of agreements, bounded rationality,
imperfect information, subjective mental models on the part of the actors and
high transaction costs. If the presence of transaction costs decisively affects
economic exchange then their relevance is even greater for the functioning of
political markets. This is so not only for political transactions carried out
between citizens and politicians, which both North (1990b) and Dixit (1996,
1998) emphasize, but also for those in which all participants are politicians,
as dealt with by Weingast and Marshall (1988), Epstein and O´Halloran (1999)
and Spiller and Tommasi (2007). In this sense, TCP allow us to make more sense
out of the political markets we observe.
Transaction Cost Politics
(TCP), besides considering the contract as an analysis unit, also studies the
enforcement mechanism of contracts, compares the different governance structures and adopts the bounded rationality supposition (Epstein and
O´Halloran, 1999). A first approach to the theoretical bases of TCP is
characterized by the following proposals: 1) the application of the
transactional approach to the political field leads us to consider political
interaction as a set of (implicit or explicit) contractual relations. In this
sense, public policies are the outcome of transactions among policy-makers. 2)
Institutions are the rules of the political game, and they determine the
incentive structure of the agents, and therefore determine a high level of public
policy outputs. 3)
Organizational structures of governance are quite relevant when
explaining the relations between institutions and outcomes. 4) Transaction
costs tend to be higher in the political field than in the economic one and
therefore the design of an efficient institutional structure becomes more
complex in the political world. 5) In recent times, we are witnessing the
progressive vision of public policies as a result of a series of inter-temporal
political transactions. 6) TCP provides a central role to the notion of
credible commitment, which justifies the importance of reputational capital and the
organizational formulae of the State.
This
paper reviews and analyses the approach of Transaction Cost Politics as a new
transactional institutionalism in political economy. Moreover, the paper places
TCP within the current panorama of new institutionalism and studies the
theoretical foundations and the main contributions of TCP up to the present
day. When revisiting the literature, we specify the most relevant contends of
the main contributions, and for the rest of references, we only mention its
arguments. The main goal of the paper is searching the theoretical sources of
TCP, and relates it with other approaches, both close and rivals. TCP is a positive
approach of political analysis, and this paper shows the analytical
characteristics of TCP in a comparative way.
Section
2 presents several approaches of new institutionalism within the social
sciences. Sections 3 presents the two approaches of new institutionalism that
formed the fundamental basis on which Transaction Cost Politics (TCP) was
constructed: Rational-Choice Institutionalism (RCI) and the New Institutional
Economics (NIE). Section 4 studies the fundamental arguments and contributions
of Transaction Cost Politics. Section 5 shows why transaction costs are so high
in political markets. Section 6 analizes the governance of political
transactions in Congress as a case-study from TCP. Section 7 compares the TCP
approach with that of Constitutional Political Economy. The conclusions are
outlined at the end of the article.
2- New
Institutionalism: An overview into the social sciences.
2.1- Definitions of
Institutions
During the last two decades of
the 20th century, institutions have reopened an agenda for research
into the social sciences based on renewed theories. The new institutionalism
has emerged in economics, sociology and political science, and has led to
sizeable progress on how institutions are understood. Nevertheless, there is no
unique definition of institutions, and several different views of institutions
can be presented. For example, Acemoglu and Robinson (2007) distinguish the
efficient institutions view, the social conflict view, the ideology view and
the incidental institutions view. According to Kingston and Caballero (2009),
we should introduce at least the “institutions-as-rules” approach and the “institutions-as-equilibria”
approach. Greif and Kingston (2011) extended that perspective: the
institutions-as-rules approach focuses on a theory of how the “rules of the
game” in a society are selected, while the “institutions-as-equilibria”
approach emphasizes the importance of a theory of motivation and thereby
endogenizes the “enforcement of the rules”.
According
to the Northian approach, institutions are the rules of the game, that is to
say, the humanly devised constraints that structure political, economic and
social interaction. Institutions consist of formal rules, informal rules and
enforcement mechanisms, and they provide the incentive structure of an economy.
This approach assumes a specific reference to transaction cost theory. “In
order to lower the costs of exchange, it was necessary to devise a set of
institutional arrangements that would allow for exchange over space and time”,
and institutions “reduce uncertainty by creating a stable structure of
exchange” (North, 1990b, p. 359). Institutions determine the level of
efficiency of political markets and the level of efficiency “is measured by how
well the market approximates a zero transaction cost results” (North, 1990b, p.
360).
Following
the institutions-as-rules approach, March and Olsen (1989) state that
institutions are “collections of interrelated rules and routines that define
appropriate actions in terms of relations between roles and situations”. Peters
(1999, pp. 18) further adds four key characteristics to the concept of
political institution: A) An institution constitutes a structural feature of
the society and/or polity. B) An institution shows some stability over time.
C) An institution must affect
individual behaviour. D) There should be some sense of shared values and
meaning among members of the institution.
The
institutions-as-equilibrium approach defines institutions as equilibrium solutions of a
game. Historical and Comparative Institutional Analysis (Greif, 1998; Aoki,
2001) assumed this view of institutions, although recent theoretical developments in institutional
analysis by Avner Greif (2006, p. 39) consider “institutions as systems of
interrelated rules, beliefs, norms, and organizations, each of which is a
man-made, nonphysical social factor”, and this definition “encompasses many of
the multiple definitions of the terms institutions used in economics, political
science and sociology”.
2.2-
Institutional approaches
The
study of institutions can be carried out using several approaches. The new
institutionalism -that has been developed on new theoretical bases during the
last two decades of the 20th Century- can be distinguished from the
old institutional traditions in economics, political science and sociology,
although there are several connection points.
a) The original institutionalism
in economics (Thorstein Veblen, John Commons, Clarence Ayres) rejected the
foundations of neoclassical analysis and adopted the methods of holism
analysis. The contributions of such old institutionalists was marked by an
anti-formalist nature, a tendency to argue in holistic terms and a
“collectivist and behaviouristic framework”, as well as their rejection to the
individualist welfare criterion and their tendency towards a certain economic
interventionism (Rutherford, 1994). It was centred on distributive consequences
of the many institutional structures and devised its theories and analysis
based on the conceptualization of power.
b) The old
institutionalism tradition in political science was made up of a set of
multi-approach heterogeneous contributions and assumed certain general
characteristics such as legalism,
structuralism, holism, historicism and normative analysis (Peters, 1999).
c) The earlier
sociological institutionalism pioneered by Talcott Parsons (1937) assumed the
existence of institutions, but it did not emphasize institutional analysis.
Just as Nee (1998, p. 5) points out the tradition of comparative institutional
analysis established in the classical and modern periods of sociology, provides
an appropriate foundation for the new institutional approach in sociology,
where Weber (1922-Economy and Society) is probably the best example
of the traditional sociological approach to comparative institutional analysis.
On
the other hand, New Institutionalism in the social sciences assumes the
choice-theoretic tradition and generally presumes purposive action on the part
of individuals, who act with incomplete information, inaccurate mental models
and costly transactions (Nee, 1998). It tends to move towards methodological
individualism, the conceptualization of voluntary exchange and the study of the
effects of alternative institutional frameworks on efficiency. In this manner,
“new institutionalism” appears to be more formalistic, individualistic and
reductionist, it is orientated to rational choice and “economizing models”, and
it shows a less-interventionist character (Rutherford, 1994).
In
economics, Coase (1984) sustained that “if modern institutionalists had any
antecedent, then we should not be looking for these in their immediate
predecessors”. NIE therefore did not arise from the old institutionalism but
was created thanks to a set of contributions that highlighted the relevance of
institutional and organizational aspects, and these contributions arose from
different scientific areas such as Property Rights Analysis, the New Economic
History, the New Industrial Organization, Transaction Cost Economics, Comparative
Economic Systems, and Law and Economics (Eggertsson, 1990). The analytical
framework of the NIE is a modification of neoclassical theory, and it preserves
the basic assumptions of scarcity and competence, as well as the analytical
tools of microeconomic theory, however, it modifies the assumption of
rationality and further adds a time dimension (North, 1994).
Nevertheless, the idea of a serious rift between the old and new
institutionalist economists has been modified in recent times. For example, North
(1994, 2005), Greif (2006) and Ostrom (2007) surpassed the limits of the
methodological individualism and the hypothesis of rationality, going beyond
the bounded rationality. In this sense, Groenewegen et al (1995) found some
bridges between new and old institutionalism via the North´s contributions, and
Hodgson (1998) pointed out the evolution of the new institutionalist project
towards a possible convergence with the thinking of the old economic
institutionalism. In spite of the considerable concern among new economic institutionalists
to differentiate themselves sharply from the old American institutionalism,
some aspects of the new institutionalism are connecting back to the old in
recent years (Rutherford, 2001).
Simultaneously
with the consolidation of the New Institutional Economics, Hall and Taylor
(1996) stated that during the eighties and nineties of the 20th
century, there existed three
approaches in political science and sociology, each of which called itself a
“new institutionalism” as a reaction to the behavioural perspectives, these
being:
1) Historical
Institutionalism developed in response to the group theories of polities and
structural functionalism, and it defines institutions as formal and informal
procedures, routines, norms and conventions embedded in the organizational
structure of the polity. This approach emphasizes the relevance of early
decisions throughout political history: the initial political decisions
determine the course of politics and consequently of any posterior political
decision (Thelen, 1999; Pierson, 2000; Pierson and Skocpol, 2002). This implies
that there exists a “path dependence” which generates an institutional inertia,
which results in the persistence of initial decisions made by government.
Historical institutionalism, whose term was coined by Theda Skocpol, has Peter
Hall (1986) as one of its principal precursors, however it was Steinmo, Thelen
and Pierson who provided some of the main contributions to this approach.
2) Rational
choice institutionalism (RCI) arose from the study of the American
congressional behaviour and it received some inputs from the “new economics of
organization”. This approach perceives institutions as a system of rules and
incentives for behaviour within which individuals try to maximize their benefit
and therefore RCI sustains that behaviour is a function of rules and
incentives. Four of its features are as follows: A) It employs a model of
rationality when it tries to explain human behaviour. B) It tends to see
politics as a series of collective action dilemmas. C) It emphasizes the role
of strategic interaction in the determination of political outcomes. D) With
respect to the origin of institutions, RCI explains the existence of the
institution by reference to the value provided by those functions to the actors affected by the institutions.
3) Sociological
institutionalism has been developed in sociology, especially in organization
theory. It considered that many of the institutional forms and procedures were
not adopted to gain efficiency, but instead should be considered as
culturally-specific-practices. This type of institutionalism, to which Hall and
Taylor (1996) incorporate the contribution of March and Olsen (1984), can be
characterized in the following manner: A) Sociological institutionalists define
institutions much more broadly than political scientists do, and their
definition includes a set of elements such as symbol systems, cognitive scripts
and moral templates. B) It emphasizes the highly-interactive and mutually-constitutive
nature of the relationship between institutions and individual actions. C) In
as far as the origin and change of institutions is concerned, institutions can
adopt a new institutionalist practice because it enhances the social legitimacy
of the organization and its participants.
A more complete map
of new institutionalism in social sciences has been presented using eight
approaches (Peters, 1999): Normative Institutionalism, Rational Choice
Institutionalism, Historical Institutionalism, Empirical Institutionalism, the
New Institutional Economics, Sociological Institutionalism, Interest Representation
Institutionalism and International Institutionalism. Although some of the
classification criterions are not clear and could be discussed or adapted, this
extended map is quite useful for understanding the diversity, pluralism and
complexity of the new institutionalism in social sciences.
In that
map, the sociological institutionalism indicated by Hall and Taylor (1996) is divided
into two approaches namely, a normative institutionalism and a truly
sociological institutionalism. A) Normative institutionalism highlights the
central role assigned to norms and values within organizations for
understanding how institutions function and their influence on the behaviour of
individuals (March and Olsen, 1984, 1989). Institutions mould their own
participants and supply meaning systems for those participating in politics,
and therefore this approach renounces the exogeneity of preferences. B) There
has been a strong institutional analysis tradition in sociological research
right from the time of classical authors such as Weber or Durkheim. Such
tradition has been maintained in areas like historical sociology and
organizational sociology and we can distinguish between an old and a new
institutional school of thought in sociology, based on the irrational sources
of institutions, the conception of relations between the institution and its
environment and the moulding role of politics. The new approach in sociology should
be construed as an individualization process of societies.
Moreover,
another approach, empirical institutionalism in politics, has been added in the
map due to its lack of theoretical approach and because it emphasizes a set of
traditional empirical institutional issues. This approach empirically studies
certain institutional differences and their effects, and furthermore indicates
that government structure conditions the politics and decisions of
governments. Empirical institutionalism
has been centred on the study of a group of applied issues, such as the
differences between presidential and parliamentary government, the case of the
“divided government”, the legislative institutionalization or the independence
of central banks. Some of these contributions are descriptive and nearer to the
old traditionalist approach (for examples, the contributions of Woodrow
Wilson), but others imply a more advanced empirical analysis (Peters, 1999).
Finally,
pointing out the aim of the study, two other institutionalist approaches have
been incorporated in the map. On the one hand, Interest Representation
Institutionalism analyses the structure of such “institutionalized
relationships” between State and society, assuming that there are many
relations in politics that are conceptualized as being less formal and highly
institutionalized, such as Kickert et al. (1997) show. The interest
representation institutionalism is especially centred on the analysis of the
actions of political parties and of interest groups. On the other hand, the
approach of International Institutionalism conceives international politics
along institutional lines and highlights the role of structure when explaining
the behaviour of States. International institutionalism perceives regimes as
international level institutions, since they generate stability and
predictability, shape the behaviour of States and promote a set of values. One
of the relevant research lines in international institutionalism has been led
by Keohoane and Nye (1977).
In this sense, the views of Hall and
Taylor (1996) and Peters (1999) on institutionalism are different but
compatible, and we should complete the overview with the incorporation of the NIE.
In order to integrate TCP within the new institutionalism, we need to first
perform a detailed analysis of RCI and the NIE.
3- Rational
Choice-Institutionalism and New Institutional Economics
3.1-
Rational Choice Institutionalism
The program of
Public Choice was the principal development of rational choice for studying
politics after the Second World War. Sometime later, academic tradition of
rational choice gave rise to a set of tasks that assumed the importance of
institutions in political life and included political institutions into the research
agenda of rational choice theory. We can therefore talk about RCI (Shepsle,
1986, 2006; Hall and Taylor, 1996, Weingast, 1996, 2002; Peters, 1999).
RCI emerged from
the rational choice approaches that assumed methodological individualism, and
it inherits the importance of basing political activity on human behaviour
theories that shape the nature of the individual. As against other approaches,
such as normative institutionalism, which do not provide a specific theory for
human behaviour, rational-choice is characterised for presenting a clear and
explicit model of individual behaviour.
However, even though Rational Choice did not attend to institutions in a
relevant manner during its early stages, it did end up generating theoretical
developments which incorporated the role of political institutions. In this
sense, some authors have used the expression “actor-centred institutionalism”
to indicate the important role bestowed to individuals by the RCI (Peters,
1999).
Rational choice
theory has provided a distinctive set of approaches to the study of
institutions, institutional choice and long-term durability of institutions
(Weingast, 1996, p. 167). This approach provides a systematic treatment of
institutions through the importation of the micro-foundations of institutional
analysis from rational choice theory. Institutions are conceived as a set of
rules and incentives that restrict the choice possibilities of political
agents, who seek to maximise their preferences within such an institutional
framework. According to Kiser and Ostrom (1982), institutions are rules that
individuals use to determine what and who is included in decision-making
situations, how the information is structured, what measures can be taken and
in what sequence, and how individual actions are integrated into collective decisions.
In this manner, RCI sets out the role of institutions in political activity as
a means of containing the uncertainty of action and political results.
RCI
considers political institutions as structures of voluntary cooperation that
resolve collective action problems and benefit all concerned. Therefore, the
way to resolve collective action problems through cooperation can be found in
formal or informal institutions, and this permits opportunistic individuals
looking for personal gains to obtain mutual benefits. Individuals
observe that institutional rules also limit the choice possibilities of
competitors, and realise that rules benefit the entire group of individuals.
Shepsle (1986) states that any cooperation that is too costly at the individual
agent level is facilitated at the institutional level. In this manner,
institutions appear as ex-ante agreements to facilitate cooperation structures,
as claimed by Weingast (2002), when he affirms that we need institutions to
obtain gains from cooperation.
RCI assumes the
following three features: 1) Rational individuals that maximize personal
utility are the central actors in the political process. 2) RCI has been
concerned with the problem of stability of results and the problem of control
of public bureaucracy. 3) Institutions are formed on a tabula rasa (Peters,
1999).
Weingast
(1996) points out four characteristic features of RCI: A) This approach
provides an explicit and systematic methodology for studying the effects of
institutions, which are modelled as constraints on action. B) The methodology
is explicitly comparative, through models that compare distinct institutional
constraints with their corresponding implications in behaviour and outcomes and
through the analysis of how behaviour and outcomes change as the underlying
conditions change. Moreover, this approach affords comparisons of the behaviour
and outcomes under related institutions within a given country and of the
effects of similar institutions across countries. C) The study of endogenous
institutions yields a distinctive theory about their stability, form and
survival. D) The approach provides the micro-foundations for macro-political
phenomena such as revolutions and critical election.
Two separate
levels of analysis can be distinguished in the RCI (Shepsle, 1986, 2006;
Weingast, 1996), namely; a) by considering institutions as fixed and exogenous,
i.e., analyses that study the effects of institutions, and b) analyses that
study institutions as endogenous variables, that is to say, why institutions
take particular forms (Weingast, 1996).
In as far as
Weingast’s (1996) first level of analysis is concerned, we have to point out
that work has been done on almost all democratic institutions such as
constitutions, the legislative body, the executive body, bureaucracy, the
courts of justice and the elections. The analysis is centred on how
institutions influence results and we can verify that micro level details have
a great influence on results.
With respect to
Weingast’s (1996) second level of analysis, it covers questions such as why
institutions take one form instead of another, and why institutions are altered
in some circumstances but not others. The rules of the game are provided by the
players themselves; and these tend to be simple rules. Institutional
arrangements are focal and may induce coordination around them (Shepsle, 2006).
A model of institutional stability must allow institutions to be altered by
specific actors and it must show why these actors have no incentives to do so (self-enforcing
institutions) (Weingast, 1996).
Institutionalists
of rational choice highlight the role of institutions in strategic interaction
between actors and in determination of political results (Hall and Taylor,
1996). However, this institutionalism does not explain the details of how
institutions are created, although it recognizes the possibility that the
creation of institutions is a rational action of actors who are interested in
the creation of the same. This approach, in any case, has a functionalist
content (Peters, 1999) and concludes a sense of “goodness” of institutions
(Moe, 2005).
3.2-
New Institutional Economics
Price theory enables us to respond to some economic matters but not to
others that require a richer theoretical body. NIE does not try to replace
price theory but tries to “put it in a setting that will make it vastly more
fruitful” (Coase, 1999b), which implies the incorporation of institutional
issues. As indicated by Arrow (1987), the NIE movement consists of answering
new questions that traditionally were not framed in economic mainstream.
NIE accepts orthodox neoclassical assumptions of scarcity and
competition, but it rejects the neoclassical assumption of perfect information
and instrumental rationality, and it considers a theoretical framework with
incomplete property rights, positive transaction costs and institutions, and
assumes a world where the passage of time matters (North, 1994).
The theoretical framework of New Institutional Economics combines the coasean notion of
transaction costs with the northian notion of institutions, such
that institutions are a medium for reducing transaction costs and obtaining a
greater efficiency in economic performance. On the one hand, Coase (1937)
generated a microanalytical approach of organizations which gave rise to
“transaction cost economics” (Williamson, 1974; 1985); while on the other hand,
Coase (1960) generated a macroanalytical approach that studied the relations
between institutions and economic performance, as well as institutional change
processes (North, 1990a). NIE incorporates both approaches, which are mutually
inter-related, that is to say, NIE studies institutions and how institutions
interact with organizational arrangements within economy (Menard and Shirley,
2005).
Property rights are one´s ability to exercise choices over a good.
Individuals will carry out transactions, i.e., they will carry out property
rights transfers, which will produce transaction costs. We can define
transactions costs as the resources used to maintain and transfer property
rights (Allen, 1991), that is to say, “transaction
costs arise when individuals try to acquire new ownership rights, defend their
assets against transgressions and theft, and project their resources against
opportunistic behaviour in exchange relationships” (Eggertsson, 2005, p. 27).
Transaction costs are the sum of costs required to perform the “transaction
function”. The carrying out of transactions can be understood as a
contracting problem, such that transaction costs are those which are derived
from the signing ex-ante of a contract and of its ex-post control and
compliance (Eggertsson 1990).
In a world with zero transaction costs, the parties concerned would
carry out all such transactions that would result in social efficiency gains.
However, as against this hypothetical world where negotiation does not cost
anything, economic markets are characterized by the presence of positive
transaction costs, and therefore no transaction is carried out whenever such
costs surpass the expected gains from such transaction. The readjustment of
rights will only go ahead whenever the value of production from such
transactions is greater than the costs implied in producing the same (Coase,
1960).
The level of transaction costs will depend on the characteristic traits
of each specific transaction as well as on the nature of the institutional
environment in which the transaction is being carried out. In this sense, every
society will have its own “rules of the game”, which will determine the cost of
carrying out transactions (North 1990a).
Understanding the relationship between institutions and economic
performance requires the study of human decision-making. NIE considers that the
orthodox rationality approach of human behaviour is defective because: a)
individual motivations are not limited to maximising wealth or utility:
altruism and individual’s self limitations also influence behaviour. b)
individuals subjectively process incomplete information of the world around
them: there is need to distinguish between reality and perception (North,
1990a). NIE defends that individuals act with incomplete information and models
that have been subjectively deduced, and assume the model of bounded
rationality, by conceiving the individual as intentionally rational but only in
a limited way (Williamson, 2000).
Along these lines, North (1994, p. 362) states that “history
demonstrates that ideas, ideologies, myths, dogmas, and prejudices matter, and
an understanding of the way they evolve is necessary”. In order to understand
the behaviour of individuals in decision-making within an uncertainty
context, NIE considers the
subjective mental models of individuals as key factors. Such mental models will
be closely linked with institutions. “Mental models are the internal
representations that individual cognitive systems create to interpret the
environment; institutions are the external (to the mind) mechanisms individuals
create to structure and order the environment” (Denzau and North 1994, p. 4).
Together with the study of mental models and human behaviour, NIE
assumes the importance of the
passage of time to create institutions. Institutional change is characterized
by increasing returns and imperfect markets with high transaction costs. In
this theoretical framework, path dependence is reinforced by the externalities
of the institutional matrix, by the processes of social learning and by the
creation of the shared mental models on which individuals make
decisions. Path dependence is one way of bridging the choice gap and binding
the evolution of a society over time (North, 1990a).
In this manner, the institutional framework not
only determines the current economic results but also delimits the set of
opportunities that affect our future situation. We can adopt an efficiency view
when analyzing evolution of institutions, according to which relative prices
are the source of institutional change, however, NIE sustains that the
existence of transaction costs provokes the agents to not always coincide
towards the search for a greater efficiency.
The NIE argues that the processes of
institutional change are normally incremental due to the increasing returns of
institutional change: A) Institutional change is an incremental process that is
heavily weighted in favour of policies that are broadly consistent with the
basic institutional framework. B) Institutional change is characterised by a
slow evolution of formal and informal limitations. C) Individual and specific
changes in formal and informal institutions can change history but will find it
difficult to reverse the course of history (North, 1990a, 1990b).
Positive economic
analysis conclusions cannot be exported from one economy to another in the case
of economies with positive transaction costs, mental models and institutional
changes: “you get a different answer for every country and every historical
situation ... there is no one way better economic system because everything
depends on the society you are in” (Coase; 1999a, p. 5).
The NIE is a research
program that continually evolves, and recent new institutional contributions
incorporate relevant advances and interesting questions on institutions.
Eggertsson (2005) presents a general framework to reflect on institutional
failure, social technology and institutional policy. North (2005) explores the
relationships among cognitive science, institutions and economic change.
Acemoglu and Johnson (2005) conclude that property rights institutions have a
first-order effect on long-run economic growth and investment, while
contracting institutions appear to matter for financial intermediation. Acemoglu and Robinson (2008) construct a model of simultaneous change and
persistence in institutions where the main idea is that equilibrium economic
institutions are a result of the exercise of de jure and de facto political
power. Recently, North, Wallis and Weingast (2009) propose
the theoretical foundations for understanding violence and social order in
human history.
4- Transaction Cost
Politics
Transaction
Cost Politics has emerged as an application of the theoretical approach of the
New Institutional Economics to political analysis from a madisonian point of view in
political economy (Shepsle, 1999). Understanding the foundations of TCP implies
a look to Rational-Choice Institutionalism and, especially, to the New
Institutional Economics:
A) Rational-Choice
Institutionalism was interested in political markets and institutions,
understood political institutions as a cooperation structure and assumed a
model of rationality for political behaviour. According to Rational-Choice
Institutionalism, TCP focuses on political institutions, and indicates that
“political institutions constitute ex ante co-operation agreements among
politicians” (North, 1990b, p. 359). Furthermore, TCP coincides with
Rational-Choice Institutionalism when it defends the assumption of a
rationality model for economic behaviour, which implies a big difference from
other institutionalists traditions such as normative institutionalism or the
old approaches. However, the TCP rationality model is not found in
Rational-Choice Institutionalism, and Rational-Choice Institutionalism forgot
the main role of transaction costs and history, and therefore we should look to
the NIE.
B) NIE points out that
the economic world is characterized by positive transaction costs and
institutions. It rejects instrumental rationality by assuming the implications
of bounded rationality and considers that the passage of time matters. TCP
assumes these three NIE foundations when studying political transactions and
institutions. “A transaction cost theory of politics is built on the
assumptions of costly information, of subjective models on the part of the
actors to explain their environment, and of imperfect enforcement of
agreements” (North, 1990b, p. 355). Moreover, TCP is interested in explaining
the differential performance of polities over time, and therefore elaborates a
theoretical framework where history matters.
TCP is different
from RCI because TCP assumes three characteristic foundations of the NIE (bounded rationality, a
transactional approach, passage of time matters). Figure 1 shows how the
extension of Rational Choice theory towards political analysis allowed the
emergence of Public Choice, with CPE as its main continuation, whereas the
extension of the NIE towards political analysis allowed the appearance of TCP. In
this sense, TCP -as an extension of the NIE- surpassed the theoretical
framework of RCI in the same way that the NIE surpassed the (instrumental)
rational choice approach. On the one hand, there is no direct relationship
between CPE and TCP in figure 1 because their theoretical foundations have
different origins, and on the other hand, historical institutionalism is shown
as an antecedent of NIE and RCI but it has not a direct influence in TCP (the
influence is indirect via NIE and RCI). Finally, we should point out that other
institutionalisms, such as empirical, normative or sociological
institutionalism, have not had influence on the emergence of TCP, and their
references have not been incorporated in the background of TCP. Even these
institutionalisms have not a fruitful dialogue with TCP nowadays.
-Insert Figure
1-
While
transactional analysis had been applied to economic and organizational
interactions by a relevant tradition of literature, the approach of TCP focuses
on political transactions and he considers that “public policy is a sometimes
explicit, sometimes implicit agreement (or transaction) among policy makers”
(Spilller and Tommasi, 2007, p. 3). In this sense, we should point out the
distinction between TCP and politics of transaction costs: TCP is an analysis
of diverse political processes based on the existence of positive transaction
costs and the governance solutions that actors come up with in order to deal
with them, whereas politics of transaction costs in its original sense would be
a direct application of economic policy that takes into account the effects of
positive transaction costs.
TCP
assumes methodological individualism and studies political transactions from a
microanalytical perspective that tries to rigorously tackle positive political
analysis. TCP sustains that political institutions matter, that they can be
analyzed and that their effect is to economize transaction costs. TCP likewise construes
political activity as a dynamic process in evolution, which is incomplete and
imperfect and which takes place in “real time”, in history (Dixit, 1996, 1998).
In the
pre-coasean neoclassical world where transaction costs are zero, political
activity would correspond to a simple assignment of rights that would permit
efficiency through transfer of rights from owners who value them less to those
that value them more (no “Pareto improvement” would stay unexecuted) (North,
1990b). This situation allows us to derive a macro version of Coase’s theorem
according to which economic growth is not affected by the type of government of
a country as long as transaction costs are zero (Eggertsson, 1990). But we can
go a step further in the reasoning process and conclude that in such an ideal
world, the political process would not matter, since an efficient plan would
always be achieved (Dixit, 1996).
TCP uses political transaction as the unit of
analysis and explains the evolution of political relationships as transactions
and contracts. It highlights the relevance of institutions in political markets
characterized by incomplete political rights, imperfect enforcement of
agreements, bounded rationality, imperfect information, subjective mental
models on the part of the actors and high transaction costs. The institutional
structure of polity acts as a set of rules that structures incentives,
determines the volume of transaction costs and biases political output.
The NIE
had focused most of its efforts in demonstrating that passage of time and
history matter. North (1990a) defended the relevance of path dependence in
economic analysis, and the notion of path dependence has been integrated too into
the organizational studies. These features are also verified for political
analysis and were thus assumed by TCP (North, 1990b; Dixit, 1996). Therefore,
such a transactional approach also assumes the importance of history and path,
which in turn facilitates a greater contact with arguments of historical
institutionalism. Really, historical institutionalism has exercised influence
on TCP through the foundations of NIE. Literature furthermore has recently
indicated the relationship between historic institutionalism and the RCI. There
are authors of historic institutionalism such as Steinmo, Thelen and
Longstreth, who appreciated the approaches of rational choice and moreover
Katznelson and Weingast (2005) have recently indicated that historic
institutionalism and RCI have many aspects in common and detect that there are
points of intersection and overlap between the agendas of both institutional
approaches. Furthermore, and through its connection with RCI, the TCP program
has points that overlap with historic institutionalism, especially regarding
the way institutions shape incentives and preferences of actors.
The
other principal effort made by NIE has been to escape from strict rationality
models in order to highlight the importance of cultural and cognitive factors
such as beliefs, ideology and myths. In this way, the instrumental rationality
approach of RCI meant that “the actors either have correct models by which to
interpret the world around them or receive information feedback that will lead
them to revise and correct their initially incorrect theories” (North, 1990b,
p. 356). Nevertheless, the NIE and TCP reject instrumental rationality and
assume bounded rationality. North’s (1990b, 1994) proposal includes the idea that
individuals make decisions based on subjective models, which had already been
presented by Weingast (1996) as one of the challenges of RCI. In this manner,
transactional institutionalism surpasses the suppositions of RCI.
This opens the possibility of indicating that
history and ideology matter in order to understand politics. The novelty of
this perspective is that it is justified through an institutionalism that had
initially strictly assumed the following two foundations: methodological individualism
and rational approach.
Regarding the main contributions of TCP, we
should point out that North (1990b) and Dixit (1996, 1998) are the two
fundamental contributors who provided the theoretical bases for the program,
while Weingast & Marshall (1988) and North (1989) formed the two relevant
precedents. An important contribution to TCP from the political science has been
Epstein & O´Halloran (1999), which applied the transactional perspective to
the delegation of powers. It included a review of the theory of TCP and, it
showed several differences and similarities between economic and political
interaction. Taking some lessons from the theory of the firm, Epstein and
O´Halloran analyzes the hold-up problem in political transactions.
The
approach of TCP is useful for organization studies. Public bureaucracy,
delegation to independent agents and political parties are three relevant issues
on which TCP has significantly contributed. Firstly, TCP assumes that the
adequate institutions of governance will depend on the characteristics of each
type of transactions. Then, all models of governance (markets, hybrids, firms,
regulation, public bureaucracy,…) should be considered if we want to determine
the best organizational structure that minimizes transaction costs so much as
possible. For example, public bureaucracy is well suited to some transactions,
such as the “sovereign transactions” of which foreign affairs is an example,
and poorly suited to others (Williamson, 1999). In this way, TCP incorporates
several efforts to study governance structures and institutional design in the
public sector (Estache and Martimort, 1999; Gallego-Calderón, 1998; Ruiter,
2005). Secondly, delegation of power to independent agents - such as the
central banks or supranational institutions like the European Commission - is
best understood as a means of reducing political transaction costs (Majone, 2001).
In fact, there are empirical studies that show that in the process of the
autonomization of government organizations, strictly economic aspects are less
relevant than factors as bounded rationality, opportunism and social
institutions (Ter Bogt, 2003). Thirdly, some contributions of TCP have tried to
advance towards a transaction cost theory of political parties. Jones and Hudson
(1998, 2001) explore how political parties reduce voters´ information costs and they
argue that if voters reduce transaction costs by relying on party signal,
politicians have an incentive to maintain party reputation. Other topics in TCP
have been the design of budgeting institutions (Patashnik, 1996), the
countries´ international institutional choices and the hierarchy in international
politics (Weber, 1997), the institutional design relying on separation of
powers among specialized agents (Laffont and Martimont, 1998) and the
governance of the relationship between private investors and governments
(Henisz and Zelner, 2004).
5- High Transaction
Costs in Political Exchange
The peculiar nature and intensity of transaction
costs in political transactions convert them into an irreplaceable concept when
we try to get a better understanding of politics. Several considerations are
essential for understanding the relevance and characteristics of political
transaction costs, and some of the most important ones must be emphasized.
Firstly,
property rights are subject to strong constraints within political
interactions: they are not safe nor do agents possess them in an unlimited
manner. While economic competence takes place on property rights that are
normally safe, political competition includes the fight for authority and this
means change of rights. Therefore, politics revolves around a set of less safe
rules.
Secondly,
contracting parties are many and cannot be perfectly identified in many cases
of political transactions. This happens especially when one of the parties is a
multiple subject; furthermore, many political contracts are neither explicit
nor formal and rest on verbal and even tacit agreements. Moreover, political
transactions affect many agents due to the wide presence of spillover effects
that enable interpretation of interaction between political agents in terms of
a “common agency” relationship with multiple principals (Dixit, 1996).
Furthermore, the structure of agency-relation amongst political actors tends to
be especially complex: an example can be the vertical agency-relation that is
configured by the chain “electorate-parliament-government-bureaucracy”, and yet
another example can be the governance of territorial distribution of power.
Thirdly, there are huge informational
problems in political transactions. The world of politics is opaque, unclear
and it is difficult to observe and measure the different factors of political
performance, such as the objects of political transaction (Pierson, 2000). In
this sense, political markets lack a measurement formula like the price system
in economic markets. Even if they were explicit, political contracts clearly
respond to an incomplete contract prototype, containing vague and interpretable
terms. This implies that the ex-post power relations matters exceedingly: the
possession of the residual rights of control is key when, for example, an
uncontracted eventuality occurs. Moreover, ex-post control rights may exert
strong influence over ex-ante contractual arrangements (Epstein and O´Halloran,
1999). Moreover, situations of asymmetric information are particularly relevant
in political transactions and the subjective models of the actors increase the
amount of transaction costs even more in political markets (therefore different
ideologies affect political exchange).
Fourthly, the problem of collective action characterizes a
wide range of political transactions. The collective nature of politics makes
the consequences of my action depend highly on actions of others, such that the
relationship between effort and effect becomes quite unclear and informational
problems are augmented (Pierson, 2000). Moreover, the short-term horizon of
political actors, who are interested in the electoral logic, contrasts with the
nature of those political decisions whose implications only play out in the
long run. While the economic marketplace possesses some strong mechanisms for
lengthening time horizons (such as property rights and capital markets), there
are no analogous mechanisms that are equally effective in politics (Pierson,
2000).
Fifthly, regarding the passage of time, the choice and evolution forces in political
markets are slower and weaker than in economic markets, leading to a
lower efficiency and a less intense choice of organisations (Dixit, 1996). That
is to say, the corrective and learning mechanisms are less effective in
political scenarios characterised by a path with increasing returns. Political institutions tend to establish a bias
towards status quo which
hampers change and adaptation to new situations, and there exists an
institutional density that incorporates constraints based on authority. In this
sense, the structure of power can hamper exchange (Pierson, 2000), and the
carrying out of institutional adjustments to reduce transaction costs. To
the above, we must add the difficulties of designing institutions that achieve
a high influence of incentives in the political process (Dixit, 1996), and the
incentive structures in politics are significantly weaker than those in
economic markets (Vanhuysse, 2002).
Sixthly, regarding the enforcement mechanisms, political action promises are a fundamental
exchange unit in political contracts but such promises are typically not
subject to a compliance mechanism (third party enforcement) and limited commitment possibilities constrain
the political process. Since public policies are not spot transactions,
cooperation requires striking and enforcing intertemporal political agreements,
that is, agreements that should be enforced over time. The intertemporal nature
of political exchanges increases transaction costs (Spiller and Tommasi, 2007).
This is the case of those contracts whose bills are not simultaneously
considered for a vote, and the case of those with non-contemporaneous benefit
flows, such as the next section will show. Moreover, public policies with more
complex transaction characteristics will require more institutional safeguards
to make them effective over time (Spiller and Tommasi, 2007), because as Ostrom
(2004) has concluded, “rules without enforcement are but words on paper”.
Based on these
characteristics, among others, transaction costs tend to be systematically
higher in political markets than in economic ones (North, 1990b; Dixit, 1996,
Caballero and Arias, 2003). Several case studies show that political
transactions are very complicated due to the impact of high political transaction
costs, such as for example Sorensen (2006) evaluated when he studied local
governments consolidations in Norway. Moreover, high transaction costs issues
tend to gravitate to polity from the economy (North, 1990b) and political
transaction costs sometimes are increased intentionally; political actors
manipulate them strategically to achieve personal objectives. In this way,
politically relevant transaction costs are also to a great extent endogenously
determined through self-interested use of government mechanisms. There are
several ways of political transaction-cost manipulation (using informational
costs, costs of negotiation, agreement or enforcement), and there are some
specific conditions under which officeholders are predicted to act via manipulation
of political transaction costs (Twight, 1994). In this sense, for example, there
is empirical evidence that shows that the enacting coalition manipulates
political transaction costs in designing US administrative agencies (Wood and
Bohte, 2004).
In a very relevant applied work, Spiller and
Tommasi (2003, 2007) have studied the institutional foundations of public
policy in Argentina from TCP and they identified some key features that do not
promote intertemporal political transactions in the country: “a legislature
uninterested in legislative activities, a bureaucracy with no long-term
objectives, a judiciary that has often been aligned with the executive, a
federal system that grants provinces little incentives for fiscal
responsibility, and an executive with excessive leeway for unilateral moves”. The
institutional framework of each country is the key factor to make political transactions
difficult or easier, and the number of players, time horizons and enforcement
technologies are some of the key institutional determinants (Scartascini, 2007).
In this sense, the framework of Spiller and Tommasi (2007) has been extended to
explain the workings of democratic institutions and political actors
(Scarstacini et al., 2010). Finally, Dixit (2003) expounds that transactions
costs are higher in less-developed countries, where the success of policy
reform will depend on the ability to alter or adapt institutions in the desired
direction and where credibly commitment to good policies without rent-seeking
is difficult (Murshed, 2001).
Therefore, high transaction
costs in political markets imply that inefficient policies and institution can
be prevalent (Acemoglu, 2003). Studying the institutions of governance that
structure political processes in each society is fundamental. We need to know
in each scenario how political institutions and historical inheritances lead to
the interrelated political behaviours that characterize the policy-making
process (Spiller and Tommasi, 2007).
6- A case-study: The
governance of political transactions in Congress
A case study can be
useful to show the possibilities of the approach of TPC on political
transactions and institutions. This section introduces the case of legislative
transaction and governance as a case analysis of TCP.
Political agreement among legislators is
necessary to pass bills in Congress. Legislators look for exchange and
cooperation to pass those projects in which they are interested.
Pre-transactional analysis was focused on vote-trading or logrolling in the
tradition that was initiated by Buchanan and Tullock. But the logrolling
tradition was “too simple to solve fundamental problems in legislative
exchange” (North, 1990b). In fact, legislative exchange has high transaction costs
due to non-contemporaneous benefit flows and non-simultaneous exchanges. It
implies that, firstly, differential patterns of benefit flows can inhibit
trading and, secondly, many potential legislative trades concern bills that do
not come up for a vote simultaneously. The explicit market form of exchange
does not resolve these problems of enforceability of legislative transactions
(Weingast and Marshall, 1988). It is necessary to establish an institutional
structure of governance that allows the agreement among congressmen and the
industrial organization of Congress should try to make legislative exchanges
easier. In this sense, “political institutions constitute ex-ante agreements
about cooperation among politicians” (North, 1990b).
Weingast and
Marshall (1988) analyzed how the Committee System of the US Congress has
relatively low transaction costs. Under this system, a legislator of committee
A can cede his intention to influence the selection of jurisdiction of
committee B. In return the members of committee B may waive their right so as
not to influence the proposals of the jurisdiction of A. The
“institutionalization of rights on the agenda control” substitutes the explicit
market exchange mechanism. Legislators seek a seat on those committees which
are more highly valued for them, instead of trading votes. The restrictive
access to the agenda constitutes a mechanism by which each committee can avoid
declining the agreements ex-post. Having a position in a committee is a type of
property right mechanism that reduces transaction costs and favours independent
negotiations among congressmen regardless of their party affiliation.
Legislative
behavior and the organization of legislative institutions are affected by
political and electoral rules. It is important to distinguish between
“party-centered electoral rules” and “candidate-centered electoral rules”,
since it is key for the incentives of congressmen. Moreover, the institutional
structure of committees is relevant for the structure of property rights of
individual congressmen. Electoral rules and committee systems are two of the
main institutional determinants of political property rights in legislative
organization, and they determine the structure of governance of legislative
organization.
While the American
Congress represents a prototype model of Congress in which congressmen have
strong property rights that facilitate the legislative transaction
(candidate-based electoral politics, powerful committees with individual
property rights), recently the industrial organization of the Spanish Congress
has been characterized by party-based electoral politics, weak committees and
the power of national leaders of each political party (Caballero, 2011). In
this sense, different models of institutional governance are presented to
facilitate political transactions. The industrial organizational model of the
Spanish Congress does not grant property rights to the individual deputies for
their committee seats, and the head of each parliamentary group has the
property rights on committees.
In this way, legislative
transactions and agreements are carried out via a hierarchical system in the
Spanish model. As long as the executive and the majority of the legislature
represent the same political preferences, the role of the Congress is clearly
reduced. On the other hand, the system of property rights regarding the US
committees reduces the high transaction costs of legislative exchange, being
that the United States Congress establishes a system of committees that allow
transactions between congressmen in order to establish majorities that permit
changing the status quo. Therefore, political parties (hierarchy) in the
Spanish case and committees (decentralized system) in the American case appear
as key factors in the different models of governance that facilitates decision
making. Each institutional structure has different implications for
policy-making (Caballero, 2011).
7- Constitutional
Political Economy and Transaction Cost Politics
Previously to NIE and TCP, the instrumental
rationality approach constituted the main research program on madisonian political
analysis from economics. Public Choice and Constitutional Political Economy
(CPE) implied a rational approach to politics. Comparing CPE and TCP will show
some of the characteristics of the new institutional approach with more
clarity.
The Public Choice research program has been
developed over half a century. Its hard core can be summarized by three
presuppositions: methodological individualism, rational choice and politics-as-exchange.
According to Buchanan (1966), such exchange approach is especially useful at
the level of constitutional political choices, when the interests of
individuals and groups are not clearly identifiable and “the great game of
politics” is configured as a positive sum game. The study of this type of
choice gave rise to the principal development within Public Choice: CPE.
CPE studies the efficiency of constitutional
rules in their positive and normative dimension. Starting from statu quo, CPE indicates how
the veil of uncertainty in constitutional decisions generates a cooperative
attitude towards consensus, and concludes the convenience of the unanimity rule
for making this type of decisions (the “rules over rules” system is studied).
The main contribution of Buchanan and Tullock
(1962) was to impose a two-level framework on analyses of collective action, by
categorically distinguishing the level of ordinary-politics from the level of
constitutional politics (Buchanan, 2003). This book meant the start of the CPE,
which was founded on the same methodological postulates as Public Choice. CPE
studies constitutional order of democratic societies to research into the
effects of such order and offer possible improvements to the same.
CPE defends a contractarian framework, both for
political analysis as well as for economic theory. However, the application and
analytical extension of this contractarian approach turned out to be limited:
on the one hand, it was unable to expand as a methodological fundament in the
economic mainstream; and on the other hand, the transactional analysis in
political studies of the CPE was short and was centred on specific issues (for
example around logrolling, or around the study of the cost of reaching
constitutional agreements). On the other hand, TCP assumes the contractual or
transactional approach, initially for economic analysis, and such approach is
later expanded from economy to political theory. Transaction is converted into
a par excellence unit for political analysis in TCP.
A notable difference between CPE and TCP
resides in the human behaviour model which they assume. The orthodox CPE adopts
the model of substantive rationality (which has been inherited from
neoclassical economy), while TCP incorporates the model of bounded rationality
(which is characteristic of NIE). These suppositions are key to understand why
a greater economicism emanates from CPE that is not quite patent in TCP because
TCP integrates economic and political logics on more flexible human behavioural
approaches.
The theoretical framework of constitutionalists
indicates that constitutional decisions are carried out behind a veil of
uncertainty, thereby permitting the analysis of “the great game of politics”
such as that of a positive sum game. This framework links constitutions with
the notion of rule and confers a key role to constitution to understand the
operation and results of economy and politics (“the constitution determines
everything”), thereby making any political action irrelevant whenever it is not
carried out in the constitutional decision level.
According to the TCP theoretical approach, the
agents involved for making constitutional decisions will act strategically
despite information problems. Dixit (1996) states that such agents are not
behind a “rawlsian” veil of ignorance. Therefore, constitutions are elaborated
rules wherein not everything is a “justice criterion” but where negotiation
power structure and the interests of several groups and agents also exert their
influence. Furthermore, constitution is just one more element within the
complex institutional framework of a society, and this framework integrates
formal and informal institutions. According to TCP, constitutions are perceived
as incomplete contracts due to their incapacity to foresee all future
contingencies, due to the complexity of specifying rules even for foreseen
contingencies and due to the difficulty to objectively observe and verify
contingencies. Thus, constitutions leave many contractual terms open for future
specification and one can gauge the weight of political acts, especially when
some of them have long-lasting effects. In this manner, TCP defends that the
distinction between rules and political acts is more a matter of level than
type and furthermore that the path of institutional evolution is made up of
constitutional rules and past political acts (Dixit, 1996).
Works carried out within the TCP program
highlight the relevance of transaction costs in political exchanges, thereby
permitting us to explain the difficulties entailed in achieving a cooperative
solution that leads to optimal efficiency. On the other hand, CPE does not
stress the central role of transaction costs for political analysis and, in any
case, it assumed a static and simplistic view of political transaction that did
not incorporate elements such as intertemporality.
TCP assumes a theoretical perspective that
incorporates the importance of the historic dimension in political studies and
assumes the challenge of delving into cognitive matters. In this manner,
history and ideologies matter in order to understand political actions.
However, CPE assumes a non-historic and non-ideological perspective in positive
analysis, and is reinforced in normative-philosophical theoretical
developments.
8- Conclusion
North (1990b) and Dixit (1996) provided the two
founding contributions to the TCP. Since then, the TCP research program has
indicated the importance of transaction costs in political markets and has
studied how political institutions determine the volume of transaction costs
and the political outcome. In this manner, political institutions become the
object of study from a transaction point of view and the map of new
institutionalism in the social sciences must incorporate TCP as one of its
approaches.
TCP is a transactional
institutionalism that studies political institutions with its own approach, and
has very few common elements with the institutional approaches of normative
institutionalism, empirical institutionalism, sociological institutionalism,
interest-representation institutionalism and international institutionalism. On
the contrary, the appearance, content and development of the TCP was possible
based on institutionalist advances of the programs of RCI, NIE and historical
institutionalism.
TCP coincides with RCI because
both are interested in political markets and institutions, both understand
political institutions as a cooperative structure and assume a model of
rationality for political behaviour. However, TCP is different from RCI because
TCP assumes three characteristic foundations of NIE (bounded rationality, a
transactional approach, passage of time matters). In this sense, TCP
constitutes an extension of NIE towards an analysis of politics from a madisonian perspective
(Shepsle, 1999).
Historical institutionalism has had an
important indirect influence on the TCP approach. The main influence was
through NIE, which understood the importance of history for institutional
analysis but eliminated any historic determinism doses and established an
institutional theory based on the fundament of individual choices. This
historical perspective of NIE was exported to political analysis by TCP.
Likewise, there were considerable points of intersection and overlap between
historical and rational choice institutionalism, and in this sense, there was an overlap with the historical
institutionalist content when TCP was in contact with RCI.
TCP thus appears as a true and
intrinsically institutional research program that occupies its niche on the new
institutionalism map of social sciences. This program is centred on positive
analysis and concludes the importance of comparative analysis in order to
understand the role of the different institutions on political transactions and
outcomes.
As a conclusion, we should point out some strengths,
weaknesses and challenges of TCP. Three relevant strengths of TCP are the
following ones: a) political transactions are considered as the unit of
analysis; b) political transactions costs can explain the existence of
inefficient institutions, therefore the governance structure matters; c) this
approach incorporates bounded rationality into the analysis. Among the weakness
of TCP, three issues should be considered: a) TCP lacks a general theory of political
institutions, and possibly this general theory does not exist; b) TCP is an approach
whose contents are slightly diffuse and the limits of the approach are not
always well-defined (for example, North´s shared mental models goes beyond bounded
rationality); c) power and coercion are very important factor in political life
and TCP has not incorporated adequately the role of coercion in political
transactions (Nye, 1997; Moe, 2005). In any case, these three weak points of
TCP are present too in the NIE.
Finally, three challenges for the future are
presented: a) TCP needs more empirical work: case-studies, institutional
comparative analysis, econometrical work and experimental techniques are useful
in a TCP that assumes methodological pluralism. b) There should be more and more dialogue and exchange between the several
types of institutionalisms. In this sense, Shepsle (2006) sustains that the
differences between some types of institutionalisms are fewer than in the past.
In order to understand the notion, role and change of institutions, we need to
assess and integrate contributions coming from the different institutional approaches.
c) Transcending disciplinary institutionalism implies too that a multidisciplinary
profile in social sciences is convenient when we are interested in institutions.
In this sense, Coase (1999b, p. 4) defended the convenience of linking economic
science with other subjects to convert it into hard science: “We have to take
account of the effects of the legal system, the political system, etc., and if
my impression is correct, their theories often have a stronger empirical base
than is usual in economics”. North (1999) works on the hypothesis of the
marriage of political and economic theory and Bates (2010) points out the
relevance of politics for the new institutionalism. Coase (1999b, p. 5) likewise
highlighted how “hybrid subjects are often astonishingly fertile” in science as
against the scientific disciplines that remain too pure, and proposed
transactional analysis as a hybrid subject prototype. The several
institutionalisms should simultaneously assume a multidisciplinary vocation in
social sciences.
The transactional approach born
in economic analysis managed to tackle the study of politics through TCP. The
search for a theory of institutions based on individual choice favours
reconciliation among the different social sciences (North, 1990a).
According to North (1999, p. 315), “What Coase started with transaction cost
approach, is well on its way to being a foundation for restructuring social science
theory in general, not just political theory or economic theory”. In this
sense, there is a road to New Institutional Social Sciences.
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Figure 1. Transaction Cost Politics
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