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Interests versus culture in the theory of institutional change?

Published online by Cambridge University Press:  23 October 2009

JOACHIM ZWEYNERT
JOACHIM ZWEYNERT*
Affiliation:
University of Hamburg and Hamburg Institute of International Economics, Germany
*
*Email: zweynert@hwwi.org.
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Abstract:

In Douglass C. North's works on institutional change, his focus shifted from formal institutions and highly rational actors to the links between culture, cognition, and the evolution of institutions. This has led to a corresponding shift in his basic explanation of institutional change: In his earlier works, institutional change is mainly caused by actions of highly rational utility-maximizing political actors. In his later works, the evolution of a society's institutions is above all a function of changes in the dominant belief system. The paper tries to contribute to the obvious task of bringing these two explanations of institutional change together. My synthetic approach rests basically on a Northian framework supplemented with three further elements: firstly, with the idea of the transfer of institutions; secondly, with the concept of functional differentiation; and, thirdly, and decisively, with an understanding of culture as a toolkit, leaving room for interest, choice, and strategic action.

Information

Type
Research Article
Information
Journal of Institutional Economics , Volume 5 , Issue 3 , December 2009, pp. 339 - 360
Copyright
Copyright © The JOIE Foundation 2009

1. Introduction

As is well known, in Douglass C. North's works on institutional change, his focus shifted first from formal institutions and highly rational actors (North and Thomas, Reference North and Thomas1973; North, Reference North1981) to the interplay between formal and informal institutions (North, Reference North1990), and then, from about the middle of the 1990s on, to the links between culture, cognition, and the evolution of institutions (Denzau and North, Reference Denzau and North1994; Knight and North, Reference Knight and North1997; North, Reference North2005). This has led to a corresponding shift in his basic explanation of institutional change: At the heart of Structure and Change in Economic History (Reference North1981) is the ‘neoclassical theory of the state’,Footnote 1 according to which institutional change is mainly caused by actions of highly rational utility-maximizing political actors. In his later works, and especially in Understanding the Process of Economic Change (2005), the evolution of a society's institutions is above all a function of changes in the dominant belief system. In his 1981 work, he had still been convinced that ‘we should be able to predict a good deal of change in ideology in strictly economic terms’ (North, Reference North1981: 50). In contrast, in his latest book he claims that ‘the beliefs that humans hold determine the choices they make’ (North, Reference North2005: 23). It is certainly a polemical exaggeration when Fine and Milonakis (Reference Fine and Milonakis2003: 567) characterize his position as a ‘combination of rational choice theory with irrational choice theory, the latter comprising whatever is left aside by the former’. But it is fair to say that North has so far delivered two explanations of institutional change without having integrated them into a unified theoretical framework (see already Rutherford, Reference Rutherford1995: 447).

The present paper tries to contribute to the task of bridging the gap between these two explanations of institutional change.Footnote 2 This attempt is strongly inspired by Weber's (Reference Weber, Gerth and Wright Mills1958: 280) famous ‘switchmen analogy’ in which he described the interaction between culture and interests as follows:

Not ideas, but material and ideal interests, directly govern men's conduct. Yet very frequently the ‘world images’ that have been created by ‘ideas’ have, like switchmen, determined the tracks along which action has been pushed by the dynamics of interest.

In my analysis, I try to integrate three well-known analytical concepts into a basically Northian framework: firstly, the idea of the transfer of institutions; secondly, the idea of functional differentiation; and, thirdly, and decisively, an understanding of culture as a heterogeneous toolkit, leaving room for interest, choice, and strategic action. The concepts of institutional transfer and of functional differentiation will be introduced in the following section. In the third one, I will re-formulate North's neoclassical theory of the state and his elaborations on culture and belief systems in terms of these concepts. Section 4, then, offers a proposal of how to bridge the gap between the two approaches. Throughout the paper, I will use the example of Russia to illustrate my theoretical thoughts, a country I have been studying for years and which, as North (Reference North1999: 9) remarks, is particularly suited to explain the problems of economic change. In Section 5, I will outline in very basic terms how the history of failed attempts at reforms in Russia might be interpreted from the perspective developed here.

2. Globalization, functional differentiation, and the transplantation of institutions

Since the fall of the Iron Curtain − which prevented people in the Eastern bloc from voting with their feet and restricted globalization to one half of the globe − more and more governments in the world have come under pressure to adapt to the patterns of social and economic life prevailing in Western Europe and in the United States of America (in the following: ‘Western’ patterns). Hence, the problem of institutional change resulting from globalization in post-socialist countries and emerging markets can reasonably be interpreted as a problem of the transfer of institutionsFootnote 3 (on this idea see Polterovich, Reference Polterovich2001; de Jong and Mamadouh, Reference De Jong, Mamadouh and de Jong2002; Roland, Reference Roland2004; Oleinik, Reference Oleinik2006; Zweynert and Goldschmidt, Reference Zweynert and Goldschmidt2006). Successful transfer always implies that the imported institutions grow together with the domestic ones.Footnote 4 Otherwise, the imported rule or set of rules will sooner or later be rejected. Therefore, adapting to Western patterns should not be associated with “institutional monocropping” (Evans, Reference Evans2004). Rather, the experience of globalization shows that those countries are most successful which are able to combine imported institutions with domestic ones.

However, in order to understand the difficulties often connected with the transfer of Western institutions we first have to understand what is so special about the Western institutional matrix. In my view, the sociological idea of functional differentiation (for an introduction see Alexander (ed.), Reference Alexander1990) offers an excellent starting point for understanding the interplay between the economic system and the other subsystems of society.Footnote 5 The European path of development since the late Middle Ages can be described as an increasing functional differentiation of society (see e.g. Jones, Reference Jones1981).Footnote 6 In the course of this process, there emerged different subsystems of society, each taking over one or more clearly defined functions within the social system. What we can observe here is nothing other than the evolution of the principle of the division of labour. Like persons interacting in a differentiated production process, the subsystems of modern Western societies (such as the political, the economic, and the legal systems, science and religion) are at the same time highly autonomous and highly dependent on each other. The division of labour among different subsystems allows for more variation within the total system in order to deal successfully with variations in the environment. As each subsystem can make connections with other subsystems, functional differentiation enables the total system to grow more complex (but also more vulnerable), and it makes faster evolution possible (see e.g. Ritzer, Reference Ritzer2003: 107–108).

According to the idea of functional differentiation, private property and a well-defined boundary between state and economy are necessary, but not sufficient, prerequisites for the emergence of a specialized economic subsystem of society. The ‘language’ of the economic system is prices, which only contain information about scarcity. Thus, prices exclude all ‘non-economic’ aspects from the communication about scarcity. This exclusion enables the economic system to develop its own logic and makes impersonal exchange on a large-scale possible (Simmel, Reference Simmel2001[1900]; Seabright, Reference Seabright2005: chapter 4).

The specialization of communication allowed for by functional differentiation is the main reason why market economies have significantly lower transaction costs than non-capitalist systems, in which different matters (political, social, ideological, economic) have to be decided on simultaneously. Just imagine a manager of a large Soviet plant who always has to decide simultaneously on political issues (his relations with the party superiors, which, by the way, were always personalized), economic ones (fulfilment of the plan), and social ones (kindergartens, schools, and even hospitals were often provided by large plants). If these decisions are transferred to specialized agencies, according to the principle of the division of labour, each of these agencies faces a simpler task and is therefore able to look into the matter more deeply, so that solutions that are more complex can be developed for each individual issue at stake.

In a functionally differentiated society, the different subsystems each develop their own logic. Hence, each of them makes sense out of its environment in different ways.Footnote 7 Such a polycentricity of rationalities is impossible where there is a generally accepted, all-embracing belief system (religious or secular), offering one single rationalization of the world.Footnote 8 This, besides lower transaction costs, is the second decisive reason for the economic superiority of functionally differentiated societies: where there is a multitude of ways to make sense of the world, there emerges room for deviating action and thought, and thus for the creation of novelty.

The fall of the Soviet Union, where the boundaries between the different subsystems were blurred by subordinating them to one all-embracing state ideology, provides clear evidence of the inferiority of functionally less differentiated societies in comparison with more differentiated ones. However, the Soviet Union is also an example of how a highly inefficient institutional matrix could survive for an historically significant period.

3. North's two theories of institutional change re-considered

In this section, I will re-formulate North's neoclassical theory of the state and his concept of cultural path dependence in the light of the concepts of functional differentiation and the transfer of institutions. This re-formulation is only a preparatory step towards the presentation of my own theoretical concept in Section 4. So the arguments put forth in this section should not be confused with my own explanation of the issues raised.

The neoclassical theory of the state re-considered

According to North's neoclassical theory of the state (North, Reference North1981: chapter 3), the ruler is an individual utility maximiser, with utility being a function of tax revenue and the stability of power. These are conflicting targets. Tax revenue can be raised by implementing an efficient structure of property rights. Making property rights more efficient, however, means decentralizing them, and this potentially undermines the ruler's power position. From the perspective of the ruler, economic growth as such is a destabilizing force (Olson, Reference Olson1963), and this enforces the trade-off. The main forces constraining the ruler in striving to exploit the population are competitors within and without the state (North, Reference North1981: 27).

Re-formulated in terms of the ideas of functional differentiation and the transfer of institutions, the argument goes as follows. Economic efficiency (and thus tax revenue) can be raised by reforms increasing functional differentiation. Establishing a well-defined borderline between the political and the economic game enables each of the systems to develop its own rationality. However, once such a borderline has been established, the ruler is no longer able to influence directly the flow of material resources to own and followers’ benefit. Also, such a differentiated order can only function if the political, religious, economic, juridical, and scientific actors all develop their own rationalizations of the world – but these may easily come in conflict with the ruler's interests. As increasing functional differentiation leads to a factual loss of power for the ruler, tight competition with other countries seems to be a necessary condition for a lasting development towards increased functional differentiation. Indeed, it has often been argued that a key factor behind the success story of Western Europe was its political fragmentation (see also North, Reference North2005: 43), which caused strong efficiency pressure.

Russia's social history since Peter the Great illustrates the conflict between external pressure and internal protection of power very well. Located on the periphery of Western Europe, again and again the country came under economic and military pressure from its Western neighbours. The greatest economic reforms in Russia's recent history were undertaken after defeats in wars against Western countries. However, as soon as external pressure diminished, reforms usually came to a quick halt and were followed by longer periods in which the rulers tried to regain close control over all aspects of social life. In the medium to long run, this re-integrative policy always led to decreasing economic and military competitiveness, before increasing external pressure enforced new reform efforts.

According to the framework developed so far, the different degrees to which countries enter the path of social differentiation are in the first place a function of the degree of external pressure. It is easy to comprehend that due to its size and its abundant mineral resources a country like Russia was and is more difficult to put under pressure than, say, Estonia – and this certainly accounts for some of the differences between the two countries. However, this is not the whole story, as there are quite a few examples in history of neighbouring countries that set off similar reforms under almost identical starting conditions but then developed at different speeds or even in different directions, and this is what we can observe both in parts of Asia and in Central and Eastern Europe today.

North's cultural path dependence re-considered

North refers to the idea of path dependence when he argues that ‘history matters’ for the way in which the members of a society cope with the challenges in their social environment. To him, ‘the way the institutions evolve reflects the ongoing belief systems of the players’. Accordingly, ‘it is belief systems that are the underlying determinant of path dependence’ (North, Reference North1994: 385). However, for North path dependence in the evolution of belief systems for its part results from a ‘common cultural heritage’, which ‘provides a means of reducing the divergent mental models that people in a society possess and constitutes the means for the intergenerational transfer of unifying perceptions’ (North, Reference North2005: 27).Footnote 9 The resulting ‘prevailing belief system’ constrains the repertoire of possible reactions to changes in the environment, and prescribes the tracks along which learning takes place in that society (Denzau and North, Reference Denzau and North1994: 13–22). North does not provide a theory on the emergence of the ‘common cultural heritage’. Thus, his explanation of institutional change in the end depends on a factor that is exogenously given and remains outside the scope of scientific explanation.

So far, North's vision clearly is one of incremental change. Individuals equipped with fairly rough and incomplete “road maps” (a term introduced by Hayek, Reference Hayek1952) of their environment try to maximize their utility. The resulting discovery procedure causes – within the repertoire of possible reactions constrained by the cultural heritage – incremental shifts in mental models, which in turn lead to gradual institutional change. However, North is aware that cognitive change sometimes takes place in a discontinuous fashion. Drawing on Kuhn's (Reference Kuhn1962) theory of scientific revolutions, he and Denzau distinguish between periods of ‘normal learning’ (= normal science) and of ‘representational redescription’ (= scientific revolutions) (Denzau and North, Reference Denzau and North1994: 23–25). Abrupt changes will happen if the prevailing belief system proves lastingly insufficient to cope with the challenges of the social environment.Footnote 10 Such long-term failures cause the old belief system to be replaced with a new one (= paradigm shift) (North, Reference North1994: 385).Footnote 11

If we combine North's vision of the interplay between cultural heritage, belief systems, and institutional change with the ideas of functional differentiation and of institutional transfer, we get the following story (which, I would like to stress once more, is not identical with my personal understanding of the matter). If two countries develop in mutual competition and if an institutional matrix based on functional differentiation leads to efficiency gains, sooner or later the country with the lower degree of functional differentiation will come under ‘imported’ differentiation pressure. Success or failure of the import of functional differentiation will mainly depend on the adaptability of the prevailing belief system reflecting the common cultural heritage. From the perspective of the paradigm of social differentiation, this adaptation will be more difficult the more the prevailing belief system is shaped by holistic patterns. For where holistic belief systems prevail, the emergence of different value spheres with different logics within society will be hard to accept for the individuals.

If we apply this framework to the case of Russia, the following story emerges. According to a common interpretation, the dominant belief system prevailing in Russia took shape under two major influences. The first of these was the ideology of the patrimonial state as it developed in fifteenth-century Muscovy (see Pipes, Reference Pipes1993[1974]: part 1). The rulers perceived the country and its inhabitants as their personal property. Hence, they claimed the right to interfere in all spheres of social life and were reluctant to accept any ideas questioning their absolute pursuit of power. A second key influence on the ‘Russian cultural heritage’ is often seen in the legacy of the Russian Orthodox Church (see e.g. Buss, Reference Buss2003). A central element of the Russian Orthodox Christian dogma is a holistic vision of society, i.e. an ideal of society as not being fragmented into different spheres (Leipold, Reference Leipold2006: 225–229). Only a society with what one might call ‘holistic harmony’ was regarded to be in accordance with the Christian dogma.

A culturalist interpretation of Russian history within the modified Northian framework as developed here so far, would read as follows: located on the periphery of Western Europe, time and again the country came under pressure to adapt to the principle of functional differentiation. As this principle contradicted the cultural heritage, the numerous attempts to import Western institutions either resulted in hybrid and incoherent mixtures with the traditional Russian ones or they failed altogether, and the imported institutions were rejected and replaced with domestic ones (Oleinik, Reference Oleinik1998: 19–21). Even after the breakdown of the Soviet Union, this story might be continued − it took roughly only a decade before the attempt to imitate the Western institutional settings was abandoned in favour of strengthening the traditional ‘vertical of power’. The persistence of the ‘cultural heritage’ and the path dependence of institutional development resulting from it seem to have been so powerful that even strong evidence of the superiority of a functionally differentiated order has not led to a lasting change of shared mental models.

4. Culture, choice, and strategic action

The two stories of institutional change outlined in the last paragraph each deliver meaningful explanations of Russia's relative failure to produce an efficient institutional structure, but they lack a logical conjuncture. In order to overcome the gap between the two explanations of institutional change, I suggest utilizing some recent insights about culture gleaned from anthropology and the related social sciences.

Culture as a toolkit

When economists argue that ‘culture matters’ for economic performance, they oftenFootnote 12 have an understanding of culture as an exogenous and homogenous factor which influences (or even determines) economic performance and development, but which itself remains more or less unaffected by institutional change.Footnote 13 Again Douglass C. North's latest works are typical of this. As Elias Khalil (Reference Khalil2006) aptly remarks, North's argumentation is culturalist rather than cultural,Footnote 14 because to him the ‘cultural heritage will, in many instances, determine success or lack of success of the actors’ (North, Reference North2005: 18, italics mine), for example: ‘Economies that had evolved a cultural heritage that led them to innovate institutions of impersonal exchange dealt successfully with this fundamental novelty [the move from personal to impersonal exchange]. Those with no such heritage failed’ (ibid.). The notion of culture as a more or less homogenous, randomly given, and unchangeable ‘cultural heritage’ holds the dangers of turning culture into a ‘catch-all’ explanation for the differences between societies that cannot be explained otherwise (see for critique thereof: Goldschmidt and Remmele, Reference Goldschmidt and Remmele2005: 456; Herrmann-Pillath, Reference Herrmann-Pillath2006: 539–540) and of cultural fatalism. In order to do justice to North, it should be mentioned that in one passage of his latest book he shows awareness precisely of this problem: ‘The degree to which such cultural heritage is “malleable” via deliberate modification is still very imperfectly understood. At any time it imposes severe constraints on the ability to effectuate change’ (North, Reference North2005: 156). In my view, precisely this issue – the endogenization of culture – is of crucial importance if we want to improve our understanding of the links between material interests and culture and institutional change.

Holistic understandings of culture as expressed in the term ‘common cultural heritage’ are irresolvably at odds with the idea of functional differentiation. All societies that are more complex than tribal communities are characterized not only by a division of labour, but also by different and competing interpretations (or in Weberian terminology: rationalizations) of the social environment.Footnote 15 One or a small number of such interpretations usually forms the mainstream interpretation, which is, however, constantly challenged by a number of competing minority worldviews. A polycentricity of worldviews is the decisive prerequisite for a society's ability to adapt to changes in the environment, in particular to sudden, external shocks (Hodgson, Reference Hodgson2001: 334; Morgan, Reference Morgan and Morgan2005: 10) by switching between different available institutional logics (DiMaggio, Reference DiMaggio1997: 278). Conversely, if culture was really stable and homogenous, rapid institutional change would hardly be possible at all (Djelic, Reference Djelic1998: 12).

After this critique, I should like to explain what I understand by the term ‘culture’ in the remainder of this paper. As I am arguing within a Northian framework, let me start with the most detailed definition of culture we find in North:

The cultural heritage provides a means of reducing the divergence in the mental models that people in a society have and also constitutes a means for the intergenerational transfer unifying perceptions. We may think of culture as encapsulating the experiences of past generations of any particular cultural group. With the diversity of human experiences in different environments, there exists a wide variety of patterns of behaviour and thought. (Denzau and North, Reference Denzau and North1994: 15)

In order to relate this definition of culture to the recent debates in the social sciences, let us take a brief look at the evolution of the understanding of culture in our neighbouring disciplines.Footnote 16 In the first quarter of the twentieth century, the concept of culture was introduced in anthropology in order to replace the concept of race to explain the differences in the development of societies. Culture was understood as ‘the whole body of practices, beliefs, institutions, customs, habits, myths, and so on built up by humans and passed from one generation to generation’ (Sewell, Reference Sewell, Bonnell and Hunt1999: 40). In the 1960s and 1970s, this static, holistic, and rather vague concept was substituted with a more flexible understanding of culture as a ‘system of symbols and meanings’. In his 1973 book, The Interpretation of Cultures, Clifford Geertz delivered the seminal definition of culture as

an historically transmitted pattern of meanings embodied in symbols, a system of inherited conceptions expressed in symbolic forms by means of which men communicate, perpetuate, and develop their knowledge about and attitudes toward life. (Geertz 2000[Reference Geertz1973]: 89)

Undoubtedly representing a step forward in comparison with the older approaches, this understanding of culture for analytical purposes still tries to isolate the factor ‘culture’ from other influences on human action, such as material, geographical, technological, or other (Sewell, Reference Sewell, Bonnell and Hunt1999: 44). A second important characteristic of Geertz's and related approaches is that they emphasize the internal coherence and logic of the cultural realm (ibid.). Especially if we keep in mind that North discusses culture mainly in the context of mental models and their impact on communication and learning, it seems justified to classify his understanding as being of the ‘symbols and meanings’ type.Footnote 17

Since the second half of the 1980s, the ‘system of symbols and meanings’ concept of culture in anthropology and related sciences has been massively challenged by authors insisting that ‘culture is a sphere of practical activity shot through by willful action, power relations, struggle, contradiction, and change’ (ibid.). According to this concept, culture is a fairly loose package of ‘publicly available symbolic forms through which people experience and express meaning’ (Swidler, Reference Swidler1986: 273). Especially the metaphor of culture as a ‘toolkit’ with the help of which

actors self-consciously craft solutions to their problems through a process of bricolage, through which they recombine already available and legitimate concepts, scripts, models and other cultural artefacts they find around them in their institutional environment (Douglas, Reference Douglas1986: 383),

has found wide acceptance in the social sciences (see e.g. DiMaggio, Reference DiMaggio1997: 267; Campbell, Reference Campbell1998: 383). The decisive point is that the focus shifts away from the question what culture is to the issue what people do with culture. This ‘practical turn’ in the analysis of culture since the second half of the 1980s has not yet made its way into economics. This is the more amazing as it is quite obvious that understanding culture in the context of ‘willful action’ offers interesting possibilities of co-operation between economics and the other social sciences, thus bridging the gap between the anthropological and sociological understanding of human action on the one hand and the economic on the other.

The symbolic and the performative concepts of culture do not mutually exclude but rather supplement each other, because engaging in cultural practice always means to utilize existing symbols (Sewell, Reference Sewell, Bonnell and Hunt1999: 47). The existing and available symbols self-interested authors can utilize may vary in different social environments. If we compare different societies in regard to the individuals’ toolkits,Footnote 18 we can both expect to find qualitative differences (different tools) and quantitative differences (a different distribution of similar tools). The qualitative differences in particular are likely to reflect some early formative influences. Some elements of a society's culture are certainly imbibed by all its members from their infancy. Others, however, are subject to conscious individual choice (DiMaggio, Reference DiMaggio1997: 265; Kubik, Reference Kubik, Ekiert and Hanson2003: 319).

If people in general react to over-complexity by producing simplifying mental models, this will not only hold for social ‘reality’ but also for culture, which is just a prime example of what John R. Searle (Reference Searle2005: 3) calls an observer dependent phenomenon. For the purpose of this paper, beliefs can be defined as the result of people's attempts to cope with over-complexity with the help of simplifying mental models. Beliefs and belief systems, my argument goes, should not be equated with culture, but seen as a category between ‘culture’ and ‘reality’, both of which are over-complex phenomena that people construct mental models about. My point then is that in the same way that individuals structure the sensory perceptions they receive from their social environment by referring to one out of a limited number of competing belief systems, they adhere to a restricted number of common competing ways to define what the relevant ‘cultural heritage’ of their society is. As parts of a ‘system of established and prevalent social rules that structure human interaction’ (Hodgson, Reference Hodgson2006: 2), perceptions of ‘the’ cultural heritage of a society are institutions. As all institutions, they are both an outcome of an adaptation to a given (social) environment, and the result of human agency (Hodgson, Reference Hodgson2006: 8). Accordingly, the relationship between culture and beliefs is a two-sided one with culture not only influencing beliefs, but culture also being constructed and chosen according to beliefs.

If culture is understood as heterogeneous and changeable, there emerges not only room for deliberate choice, but also for strategic action of political entrepreneurs.Footnote 19 If the cultural identity of individuals in a society is a variable strategic factor in regard to their political belief systems and thus (in democracies) also to their voting behaviour, strategic actors have an incentive to spend resources on influencing other individuals’ cultural identity.Footnote 20 As the activities of such strategic actors aim at the definition of the cultural heritage of a society, I suggest the term ‘cultural entrepreneur’, which according to my knowledge has been introduced by the Polish political scientist Jan Kubik (Reference Kubik, Ekiert and Hanson2003: 319). The cultural entrepreneur is an entrepreneur in the Schumpeterian sense (Campbell, Reference Campbell, Hage and Meeus2006: 507–508), who, for strategic purposes, produces novelty by re-combining elements already existent in the cultural toolkit of society.Footnote 21 An important task of the political entrepreneur willing to pursue ‘westernizing’ reforms is to introduce new ideas into the belief systems of her or his fellows. In doing so, it can be assumed, s/he will be the more successful, the more s/he manages to ‘sell’ the imported ideas and institutions as compatible with ‘the’ cultural heritage of the importing society.

The toolkit concept of culture in action

In order to illustrate the theoretical implications of the toolkit concept of culture for the theory of institutional change, let us again start from a scenario of two countries with different degrees of functional differentiation developing in military, political, and/or economic competition. Due to cultural variety, the toolkits in both societies contain elements that are compatible with functional differentiation as well as elements that are not. As periods marked by gradual co-evolution of culture and social reality make up the larger part of history, there will ceteris paribus be relatively less ‘pro-differentiation’ and relatively more ‘anti-differentiation’ elements in the less differentiated society and vice versa. Further, we can assume that the pro-differentiation elements in the less differentiated society will be stronger the more intense cultural and personal exchange is with the more differentiated society. These two determinants of the composition of cultural toolkits are of a structural nature. Belief systems, however, do not only reflect the social structure, but they also have a specific component. Thus, particular cultural legacies (not forming a homogenous whole but consisting of a certain quality and distribution of tools among the individual members of society) can lead to different abilities to cope with the challenge of functional differentiation despite similar structural starting conditions. They will disturb the process if they promote holistic belief systems and hence strengthen the anti-differentiation sentiments (which we can expect to be relatively strong for structural reasons anyway), and vice versa.

If functional differentiation is suddenly imported into a previously less differentiated society, there emerges a gap between social ‘reality’, belief systems, and cultural toolkits. In the institutionalist literature, the problems emerging in periods of rapid institutional change are usually traced back to the different development speeds of ‘formal’ and ‘informal’ institutions (e.g. Roland, Reference Roland2004). If we distinguish between culture and beliefs and regard the latter to be influenced both by culture and by daily experience, we understand that in cases of rapid institutional change tensions can emerge at two levels: between ‘reality’ and belief systems, and between belief systems and culture. The lasting success of the transfer of institutions depends on whether such tensions can be overcome at both levels.Footnote 22 A particularly relevant scenario would be that a persisting gap between expectations (based on a majority belief system) and ‘reality’ leads – as North would predict – to a relatively quick shift in the dominant belief system. According to North and Denzau (Reference Denzau and North1994: 23–25), this might lead to representational rediscription, that is a sudden replacement of the old belief system by a new one. As Fiori (Reference Fiori2002) has shown, the concept of representational rediscription is potentially at odds with North's overall gradualist vision of institutional change. For how can beliefs suddenly change if they are thought to be so strongly influenced by legacies from the past? The distinction between beliefs and cultural toolkits helps to clarify this point. If the shift in belief systems (caused for example by disappointed expectations) leads to a corresponding shift in the dominant way people make sense of their culture (this usually means a minority perception becoming mainstream), a sustainable shift in the mainstream perception of reality is possible. If, on the contrary, the new beliefs fail to take root in the cultural toolkits, in the medium to long run they will – despite the original shift in belief systems – be either modified so that they fit the cultural toolkits, or they will be rejected. This would result in a failure to achieve lasting economic change.Footnote 23

Which of the two scenarios will take place is not solely a matter of chance. To a significant degree, it depends on the right selection of institutions to be imported, their adaptation to domestic conditions, and the political actors’ ability to ‘sell’ reform concepts in a way that makes them appear as fitting and familiar. As I am concerned here with issues of culture and beliefs, I will concentrate on the third point. The acceptance of reforms can be increased by ‘packing’ the ideas and institutions to be imported into a rhetoric that emphasizes their compatibility with ‘the’ cultural heritage of the importing society and/or by re-inventing the country's historical past in a way that emphasizes the cultural compatibility between domestic traditions and reforms. In this context, Müller-Armack (Reference Müller-Armack1932: 213), the inventor of the term ‘Social Market Economy’, stressed the role of ‘half true, half invented stories’.Footnote 24 In order to push through a political agenda, one of the most promising strategies is to tell stories which sound familiar to the audience but which at the same time ‘smuggle’ a new message into people's minds. Culture, then, is not only a constraining variable for the political entrepreneur, but also an enabling one (Campbell, Reference Campbell1998: 394; Thelen, Reference Thelen, Mahoney and Rueschemeyer2002: 213). However, as the entrepreneur still has to fit new ideas into the existing domestic toolkits, Margaret Weir (Reference Weir, Steinmo, Thelen and Longstreth1992) aptly speaks of ‘bounded innovation’.

As we are dealing here with strategies that have to be developed for specific societies, I confine myself to a limited number of examples. A particularly instructive case of successful institutional adaptation is the German ‘Social Market Economy’ (Klump, Reference Klump and Streissler1997; Zweynert, Reference Zweynert2006). Post-war development in Western Germany certainly took place under the guidance of the Western Allies, especially the USA. At the same time, there were local actors (economists and politicians) who were aware that the economic reform programme needed to be fitted into the traditions of the country. The concept paid tribute to the holistic traditions of German thought by claiming to reconcile social integration with the market and by combining market liberalism with a rather conservative vision of social life. Making up for ‘destabilizing’ differentiating reforms through cultural conservatism is one of the standard strategies of reformers aware of the necessity to ‘take along’ society on the path to reforms. This principle is very obviously at work in today's Turkey, where a moderately Islamist party is most successful both in pursuing consequent market reforms and in finding broad public support. A typical example of cultural ‘story-telling’ is the so-called ‘neo-conservative revolution’ in the USA, when the low tax/lean state policy was advertised with reference to traditional US-American family values (Campbell, Reference Campbell1998: 395–398). It was also family values that South-Korean managers regularly referred to when it came to the task of managing large enterprises without having the Western experience of impersonal, horizontal interaction on a large scale. The image of the big company as an ‘extended traditional family’ helped to turn an imported and alien institution into something that could be coped with by applying domestic cultural tools (Campbell, Reference Campbell2004: 60).

These examples show how actors engage in the ‘translation’ (Djelic, Reference Djelic1998: 272; Campbell, Reference Campbell, Hage and Meeus2006: 506) of new ideas into a rhetoric compatible with traditional and familiar belief systems, and how they try to introduce these ideas into the domestic cultural toolkit in a process of ‘bricolage’ (Douglas, Reference Douglas1986: 66–67; Thelen, Reference Thelen, Mahoney and Rueschemeyer2002: 227; Campbell, Reference Campbell, Hage and Meeus2006: 507–508). In order to do so, the political as a cultural entrepreneur has to be perfectly familiar with the society in question. Therefore, as Djelic (Reference Djelic1998) has shown in her excellent study on the transfer of US-American competition policy to Western Europe after the Second World War, the participation of local actors seems to be prerequisite for successful institutional transfer.

Just as reform-willing politicians will make up stories to prove the compatibility of the cultural traditions with the intended reforms, their opponents will tell stories to prove just the opposite. Whether reforms will be sustained or not then depends on the initial distribution of power between the political actors (or, in a more economic terminology, the degree of competition on the political market) (Djelic and Quack, Reference Djelic, Quack, Dejelic and Quack2003: 18), the ability of the actors to communicate their programmes in a language that ties in with the beliefs of the population, the specific cultural traits, and the external factors, such as the international business climate. Given this multiplicity of influences, one has to accept that periods of rapid institutional change are open processes, the results of which are difficult to predict. The outcome of attempts of ‘Westernizing reforms’ is not determined by ‘the’ cultural heritage. More than that what the majority of the individuals regard as their cultural heritage will be, at least partly, an outcome of political clashes between actors pursuing their interests (Sewell, Reference Sewell, Bonnell and Hunt1999: 57).

5. Culture and interest in the case of Russia

To many observers, the immense difficulties with which the attempts to introduce ‘Westernizing’ reforms have met in Russia since the 1990s provide strong evidence of cultural path dependence in institutional change. This thesis has been developed most clearly by Hedlund, who published an in-depth study on Russian Path Dependence in 2005. The central argument of the book is that in the Middle Ages in Muscovy there emerged the institutional structure of a patrimonial state characterized by an almost total fusion of state power and property. By the middle of the seventeenth century, Hedlund argues, this structure locked in, and all attempts to change the institutional matrix in any fundamental way have failed so far.Footnote 25

According to a definition by Mahoney (Reference Mahoney2000: 535, my italics) widely accepted in historical sociology, path dependence can be defined as a process that ‘occurs when a contingent historical event triggers a subsequent sequence that follows a relatively deterministic pattern’. Now, while in North the ‘common cultural heritage’ is a factor that remains outside the scientific explanation and can thus be regarded as contingent, Hedlund – and this is the major achievement of his study – explains very convincingly how the ideology of the patrimonial state took shape under the influence of empowered and self-interested actors. It was the Russian Orthodox Church, he argues, that by ‘creating a virtual past’ (Hedlund, Reference Hedlund2005: 117–119) provided the rulers with a religious myth that justified their claim for absolute control over all aspects of social life: the idea of Moscow as a Third Rome. According to it, the first and the second Rome (Byzantium) had fallen because the secularization of the Christian faith (that is, the attempt to justify belief with reference to reason) had led to a pernicious fragmentation (permitting a division between belief and reason) of these societies and eventually to their decline. It was Russia's mission to maintain and spread the true Christian faith to mankind, a view that would ensure that all aspects of action and thought would remain subordinate to the religious dogma. This teaching can clearly be seen as a defensive reaction against the beginning differentiation between polity, Church, and science in contemporary Western Europe. The notion of Moscow as a Third Rome is a prime example of a ‘half true, half invented’ story. It adopted a specific feature of the Orthodox belief (holism) and strengthened it through skilful story-telling in order to achieve a political goal.Footnote 26 As Richard Pipes (Reference Pipes1993[1974]: 232) put it, ‘the entire ideology of royal absolutism was worked out by clergymen who felt that the interests of religion and church were best served by a monarchy with no limits to its power’.

This way, the Russian Patrimonial-Orthodox tradition is not a randomly given ‘cultural heritage’, but to a significant degree the outcome of successful bounded innovation by actors pursuing their interest. Whether or not we should speak of a lock-in, it is certainly the case that the medieval Patrimonial-Orthodox ideology was internalized by vast strata of the population and could be exploited by political actors trying to immunize their claim to power against the threat of imported functional differentiation. This could be observed most clearly during the reign of Nicholas I (1825–1855) when an arch-conservative policy was officially based on the formula ‘Autocracy, Orthodoxy and National Character’.

The Russian nihilist and atheist intelligentsia that formed in the 1850s and 1860s can be regarded as a mirror image of the patrimonial state. The mixture of anthropocentrism, holism, intolerance, irreligious religiosity, and superficial knowledge of Western ideas that was typical of its members had its roots both in the experience of political repression and in the specific traditions of Russian Orthodoxy.Footnote 27 After the crushing defeat in the Crimean War (1853–1856), a strong external shock, had revealed the disastrous outcome of the reactionary rule of Nicholas I, Russia entered an age of ‘great reforms’, aiming at a fundamental transformation of the institutional matrix. The attempt to switch to Western patterns of social development was opposed both by conservative adherents to the patrimonial state and by the left-wing intelligentsia (who dreamt of realizing the Russian Orthodox ideal of a holistic society under the banner of peasant socialism). Consequently, the thin stratum of ‘Westernisers’ in science, administration, and politics were under permanent cross-fire from both sides.Footnote 28 Indeed, it was a ‘coalition’ between the forces of the left and right that put an end to the reform period under Alexander II. Only a couple of days before the Tsar was to sign a document that would have come close to a constitution, he fell victim to left-wing terrorists − and this was the very opportunity the reactionaries had been waiting for in order to take over.

However, the reactionary turn could not prevent the cultural transformation that had set in with Alexander's reforms from continuing. The decade between the First Russian Revolution of 1905 and the outbreak of the First World War saw a Russian ‘Silver Age’ in which the intellectual life of the country freed itself more and more from the panmoralism of the leftist intelligentsia. We simply do not know how Russia's history would have continued without the First World War. The October ‘Revolution’ was the result of both this external shock and of domestic traditions. In my view, North and others grasp only half the truth when they claim that Marx and Engels had delivered the belief system for Lenin and his comrades (North, Reference North2005: 3–4). Rather, when Marxism was imported to Russia it mingled with the intellectual traditions of the Russian intelligentsia that were strongly influenced by Russian Orthodoxy (Zweynert, Reference Zweynert2002: 262–265).Footnote 29 The Russian Bolsheviks proved to be excellent cultural entrepreneurs able to fit the atheist ‘religion’ of Marxism into the habits of thought of those parts of Russian society that had not yet mentally arrived in the twentieth century. Since the 1930s, when the CPSU began officially propagating a nationalist version of socialism, the party used Marxism–Leninism to prevent the inflow of Western ideas, thus to avert functional differentiation and to justify its absolute claim to power. This exploitation of a (pseudo)religious dogma in order to justify absolute state power is reminiscent of the Russian Middle Ages, and, as has been often and rightly argued, the doctrine of Russia as the cradle of the World Revolution was nothing but a transformed version of the idea of Moscow as Third Rome. The Bolsheviks exploited a part of the cultural toolkit of Russian society that – and this is the decisive point – had been in decline since the second half of the nineteenth century but was still strong enough to be revived by skilful cultural entrepreneurs pursuing their political interest. In this sense, again, the problems we can observe in today's Russia definitely are closely connected with the country's history and culture (and indeed with traditions reaching back to the Middle Ages), but to a significant degree this heritage results from the actions of self-interested actors.

Much speaks in favour of the thesis that when Gorbachev came to power the lock-in of majority beliefs incompatible with a social order based on functional differentiation was much stronger than it had been at the eve of the October ‘Revolution’. Up to the middle of the 1980s, political leaders and the majority of the population were convinced of the competitiveness of the social order of the USSR. The CPSU never managed to fully unify belief systems, so there were always dissidents. However, in striking contrast to most countries of Central Europe, there was never any significant bourgeois/liberal underground discourse in the Soviet Union (see Kubik, Reference Kubik, Ekiert and Hanson2003). This is an important reason why (again in contrast to Central Europe), after the breakdown of the socialist system, there were no actors able to ‘translate’ Western reform concepts to suit the Russian cultural context and to take society along the path of Westernizing reforms, and this was certainly one of the main reasons for the failure of reform. As a result of the chaotic Yeltsin-era, the term ‘democracy’ is utterly discredited among the Russian population. Today it becomes ever more obvious that Vladimir Putin and his government have skillfully exploited this experience for both a reappraisal of the Soviet past and to reinforce the feeling of ‘being culturally different’ from ‘the West’. This ‘being different’ has always been and remains to be a ‘half true, half invented’ story. There is no doubt that there is a difference between Russia and the West, but the fact that the authoritarian rulers again and again exploited this cultural difference to secure their power position is the more relevant thread in Russian history.

6. Conclusion

Giving up the notion of culture as something homogenous and more or less unchangeable, and replacing it with the image of a heterogeneous ‘toolkit’ helps to bridge the gap between interests and culture in the theory of institutional change. This toolkit so to speak provides the ground on which competing political actors as cultural entrepreneurs can play in order to push through their interests and political agendas, both constraining them and enabling them to engage in bounded innovation. Thus, culture turns into an important strategic factor of policy-making. The fact that cultural legacies often have a rational core (representing power interests of identifiable actors) does not prevent them from being internalized and thus becoming a part of individual socialization.Footnote 30 In societies in which cultural factors seem to hamper economic and/or political development, it is important to ‘un-lock’ cultural legacies by making them the object of public debate. By revealing the interests behind the formation of culture, institutional economists certainly have much to contribute to such ‘enlightening’ debates.

Footnotes

1 Certainly, the neoclassical theory of the state makes up only one chapter in his 1981 book (chapter 3). However, North himself mentions only this theory when summarizing the content of the book in his Institutions, Institutional Change and Economic Performance (Reference North1990: 7).

2 For similar attempts (based on other approaches than the one presented here) see e.g. Bates et al. (Reference Bates, de Figueiredo and Weingast1998) and Kuran (Reference Kuran1998). The former explicitly emphasize the necessity of a synthesis in view of transition. As they rightly claim, ‘the greatest achievement of rational choice theory has been to provide tools for studying political outcomes in stable institutional settings. But in moments of transition, rules are ill defined, and symbols, emotions, and rhetoric seem to count for more than do interests, calculations and guile.’ (Bates et al., Reference Bates, de Figueiredo and Weingast1998: 222)

3 In an earlier version of the paper, as well as in a paper with Goldschmidt (2006), I spoke of the transfer and the transplantation of institutions synonymously. However, one of the referees has convinced me not to use the term ‘transplantation’ in this context any more, for the analogy suggests that one and the same set of rules is made to function in a different environment. Yet this is not what can be expected when institutions are imported in a society. The term ‘transfer’, in contrast, does not at all exclude the possibility that imported rules will be significantly altered (and maybe even function in a different way) when applied in a different context.

4 The most often quoted examples of a successful transfer of institutions are post-War Germany and Japan in the 1860s and again after World War II. In both cases, basic rules of the game were imported from the United States of America but were put in practice with significant tributes to domestic traditions.

5 The advantage of this approach is that it offers a theory of the interplay between different parts of society rather than focusing on the economic system. However, some institutional economists also do pay attention to the interplay between the different subsystems of society when explaining economic change. For example, the approach chosen by North et al. (Reference North, Wallis and Weingast2006) has much in common with the line of argument suggested here. I prefer the idea of functional differentiation because in my view it makes especially clear why and how countries come under pressure to adapt to advanced countries and why the import of ‘Western’ institutions conflicts with the ruler's power interests in autocratic societies.

6 There is neither any ‘natural law’ behind this, nor was it or is it a permanent development in one direction. But if we look at European social history since the Middle Ages, for this particular region over about the last 500 years there clearly was a tendency towards greater functional differentiation.

7 In the terminology of Max Weber, in a differentiated world, the number of ‘value spheres’ corresponds with the number of possible ‘rationalizations’ of ‘reality’ (Weber, Reference Weber, Gerth and Wright Mills1958: 26).

8 However, the ‘division of rationalities’, which is typical of Western societies, rests on the all-decisive common belief that different perceptions of ‘reality’ and ‘truth’ are possible and should be tolerated – except those that would endanger polycentricity.

9 One detail is interesting here; this passage is almost identical with a formulation in North's joint article with Denzau on ‘Shared Mental Models’ (Reference North1994), with the difference that Denzau and North speak of ‘the cultural heritage’, not of a ‘common cultural heritage’. This point is important for my own line of argument, and I will come back to it.

10 ‘Failure’ here would include the awareness that another society does better in coping with similar challenges.

11 North explicitly acknowledges that this is a somewhat ‘hubristic assertion since little is really known about this crucial subject, which is essential to the successful transformation of Eastern Europe and the Third World’ (ibid. n.).

12 But not always. To quote one exception, Lavioe and Chamlee-Wright (Reference Lavoie and Chamlee-Wright2000: 14) provide a ‘culture as context’ definition according to which culture is ‘an aspect of virtually any causal factor one might identify, not a separate causal factor on its own’.

13 Certainly, most of these authors are aware that culture does change in the long run. But if one thing is clear, it is that in institutional economics nowadays path dependence is a much more debated topic than path change (see Kyriazis and Zouboulakis, Reference Zouboulakis2005: 110).

14 Very much in line with my argumentation, Khalil's (Reference Khalil2006: 3) main point of critique against North's culturalist approach is that it ‘neglects the role of choice in manufacturing cultural norms’.

15 Although North is perfectly aware that once a society has reached a certain degree of complexity ‘widely disparate beliefs may be held’ (North, Reference North1999: 10, Reference North2005: 2; see also North, Reference North1981: 7), he removes this problem quickly by introducing the notion of ‘dominant beliefs’ (Reference North1999: 11, Reference North2005: 2) based on the ‘common cultural heritage’.

16 In the following, I basically follow the anthropologist's William H. Sewell's, Jr. excellent essay on ‘The concept(s) of culture’ (Reference Sewell, Bonnell and Hunt1999).

17 As is sometimes the case with North, it is difficult to classify his views clearly, since he sometimes tends to use the same term in different senses. So if one looks at North's alternative definitions of the term culture (e.g. as ‘a cumulative structure of rules, norms and beliefs that we inherit from the past’ (North, Reference North1999: 15), or as ‘the cumulative aggregate of the surviving beliefs and institutions’ (North, Reference North2005: 83)), as well as at his statements on the influence of the cultural heritage on prosperity or lack thereof of nations, he seems to be closer to the first-mentioned understanding of culture.

18 For example by analysing representative surveys.

19 As Herrmann-Pillath (Reference Herrmann-Pillath2006: 544) aptly puts it: ‘Since culture is meaning, people are also able to manipulate meanings for the sake of their individual interest.’ In their paper, mentioned in footnote 2, Bates et al. (Reference Bates, de Figueiredo and Weingast1998: 223) also emphasize the role of ‘strategic manipulation of political symbols and mobilization of cultural differences’, and they provide an illuminating case study of the way in which Slobodan Milosevic both exploited and created ethnical tensions within former Yugoslavia (pp. 226–230).

20 It deserves to be mentioned that in his 1981 book North explicitly spoke of ‘investments in legitimacy’ and of ‘ideological entrepreneurs’ who invent and distribute new ideologies (North, Reference North1981: 54).

21 By emphasizing the ability of political entrepreneurs to set new issues on the political agenda, thus to create novelty instead of just passively adapting to the preferences of the electorate, the idea of cultural entrepreneurship has much in common with the evolutionary economic theory of politics as suggested by Slembeck (Reference Slembeck1997) and Wohlgemuth (Reference Wohlgemuth2002). Of course, the political entrepreneur is not the only actor creating cultural change. S/he is especially important in periods of rapid change, the topic this paper is mainly concerned with. In smooth times characterized by incremental change, a figure Pejovich (Reference Pejovich2008: chapter 14) calls ‘pathfinder’ is more important. Pathfinders are persons who shift the margin of socially tolerated behaviour in a society by deviant behaviour.

22 In order to avoid a misunderstanding, at the risk of repetition it should be stressed that the transfer of institutions does not mean that one (Western) institution is imported and implemented as it is in a different country. Rather, the emerging institutions typically are to a certain degree hybrids between traditional domestic and imported institutions (see Stiglitz, Reference Stiglitz1994: 219; Stark and Bruszt, Reference Stark and Bruszt2001: 1130). The decisive question is only whether these hybrids will fulfil the function they have to fulfil in a market order or not.

23 As I have argued in two papers on the debate about transition in Russian economics between 1987 and 2002 (Zweynert, Reference Zweynert2006b and Reference Zweynert2007), this is precisely what one can observe in Russian economic discourse. Around 1990 there was a brief period of enthusiasm for Western liberal economics which could not be sustained in the medium to long run and was soon replaced with concepts more compatible with the prevailing habits of thought. Much speaks in favour of the thesis that the recent development in Russian economic policy reflects what one might call a ‘failed transition of the mind’.

24 His example were the German industrial lobby groups of the 1920s who had exploited the then wide-spread belief in the inevitability of growing industrial concentration in order to satisfy their interest in cartelization.

25 The thesis of the patrimonial state which emerged in Muscovy in the Middle Ages and which decisively shaped the further development of the country is well established in Russian historiography (see e.g. Pipes, Reference Pipes1993[1974]). Hedlund's innovation is to interpret this story in light of the path dependence thesis.

26 In contrast to Western Europe, where there was a strong competition between state and church, in the Greek Orthodox Church the idea of harmony between worldly and clerical power − which, however, could be clearly distinguished from each other − dominated. It was this Orthodox idea of harmony (an idea not necessarily contradicting an order based on functional differentiation) which was skillfully exploited both by the state and the clergy in order to achieve a fusion between state and society in Russia.

27 A remarkable number of Russian activists in the revolutionary movement had a religious biographical background.

28 This became obvious in the debate on the dissolution of the obshchina, the Russian rural commune in the late 1850s. Only a small group of liberals recommended the introduction of private landownership, whereas both the Russian conservative romantics and the socialists fought for the preservation of collective landownership.

29 In my view, Zilberman (Reference Zilberman1977: 363) hit the nail on the head when he argued that ‘Marxism only “reminded” the popular Russian consciousness of its traditional way’.

30 For an outstanding analysis of the cultural socialization process, see Berger and Luckmann, Reference Berger and Luckmann1966: 59–72.

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