The theory of evolution is under attack. In this case, however, the attacker, Kathleen Thelen, comes armed with far more plausible evidence than the proponents of “intelligent design,” and the creatures being analyzed are not plants and animals but key economic institutions, such as vocational training systems, organized labor, and employer organizations.

In political economy, as in the natural sciences, the prevailing current view of evolution is “punctuated equilibrium”—the theory that long periods of relative stability are disrupted by exogenous shocks (e.g., an economic or asteroid crash) that give rise to relatively clean slates when it is possible to make radical changes in existing ecosystems. In How Institutions Evolve, Thelen uses a two-pronged historical approach to challenge this view. Combining a cross-case comparison of the origins of skill-development systems in the United States, Britain, Japan, and Germany at the start of the twentieth century with a century-long longitudinal analysis of the evolution of the German training system, she demonstrates that there is a strong path dependence in the history of how institutions evolve in each country. In her account, the strategies of firms in core skill-intensive sectors such as metalworking interacted with the associations of craftsmen who had traditionally controlled the training of skilled workers to shape each nation's institutional structures, structures that continue to exert a strong influence in how each of these economies operate today. As she summarizes: “In Germany, metalworking firms at century's end were concerned to certify skills, in Britain to reassert managerial control, in Japan to dampen labor mobility, and in the United States the goal was above all to rationalize production and reduce dependence on skilled labor altogether (author's italics) through technological change, work reorganization, and product standardization” (pp. 280–281).

Not only did the development of these early institution have lasting consequences, but Thelen also argues that even radical shocks will not necessarily disrupt these systems. On the contrary, Germany's experience following the loss of two world wars and later reunification with East Germany demonstrates that “in times of crisis or deep uncertainty, political actors often specifically eschew experimentation and instead fall back on familiar formulas—resulting in institutional reproduction not change” (p. 292).

Although she critiques the punctuated equilibrium view of institutional change, Thelen is careful to avoid the other extreme of overly determined path dependence. In her view of history, institutions once formed do not lock policymakers into certain choices; rather, they are like sharks that must keep moving and adapting to their changing environment if they are to survive. One of the book's most important contributions is showing how key policy actors—for example, large German employers and labor unions—who originally opposed the creation of a craft-dominated apprenticeship system, were able to transform the system over time to meet their needs, eventually becoming key pillars supporting the German model of training. Although not using the term, Thelen's account supports Stephen J. Gould's evolutionary concept of “exaptation,” where an institution (or organism), originally intended for one purpose evolves to perform a very different function.

Thelen's in-depth historical analysis thus provides key insights on how institutions form and change that are of relevance to scholars well beyond those interested in skills issues. The question she leaves unresolved, however, is what type of change occurs when a closely intertwined set of institutions is no longer well adapted to its environment as, some have argued, is now the case for the German model. Falling back on the traditional apprenticeship approach was not only familiar but also a functional solution to the problem of high youth unemployment following World War II and reunification, but this approach appears not to be working as well today. In her brief analysis of the contemporary German situation, Thelen reviews a number of forces that threaten the German dual system in ways that may differ from past crises—intensified competition, shifts to more team-based production systems, an imbalance between the costs and benefits of apprenticeships to employers, the challenges posed by reunification, and the availability of a greater supply of university graduates. To her discussion of international competitive pressures she might have added the expansion of the European Union and the rapid emergence of China and India as much lower cost competitors in manufacturing and high-tech services, which have further increased the low-cost labor alternatives open to German employers. As the author notes, a growing number of German companies have been defecting from the apprenticeship system, with a consequent decline in the number of training places and a sharp increase in the level of youth unemployment.

What Thelen avoids is reaching any conclusions on whether the German apprenticeship system can be adapted once again to cope with this new set of demands, and if so, what changes are needed. Rather, as a careful historian, she notes that while the system is under serious stress, it would be premature to declare the death of the German model, and that any solution will mean finding ways to keep “individual firms invested (and investing) in the system” (p. 277). Even here, however, her analysis is equivocal. She notes on the one hand that the “German vocational training system … rests on (firms) voluntarily taking apprentices.” On the other hand, she says that “no one can force German firms to train,” and then a few sentences later refers to Chancellor Gerhard Schroder's proposed “government-imposed training levy” (p. 276).

The recent experience of the British education and training system suggests that potentially, even radical changes in skill outcomes may be accomplished within Thelen's exaptation approach of transforming existing institutions. Trapped in a “low-skill equilibrium” and lacking the institutional supports to reinvent its own failing apprenticeship system, Britain opted for a U.S.-style skills solution. In less than a generation, Britain has shifted from an elite higher education (HE) system, with one of the lowest participation rates among the developed countries, to a mass HE system that is now graduating more young people with degrees (33% of the cohort) than the United States, with a target of 50% of young people receiving an HE qualification by 2010. This broadening of participation was accomplished with essentially the same institutions through a set of policy changes that included reform of the examination system, the merging of polytechnics and universities into a unified and much more competitive HE sector, alteration of funding rules to reward further education and HE institutions that attracted students, and a controversial decision to ask individuals to bear a small portion of the costs of their HE for the first time.

The British case does not offer the right solution to Germany's current economic and skills issues, but rather suggests, like Thelen's strong comparative and historical analysis, that the most likely answer to Germany's current malaise will involve key actors adapting existing German institutions to the challenges of the knowledge-driven economy of the twenty-first century.