Socio-Economic Review

Socio-Economic Review Advance Access originally published online on October 8, 2008
Socio-Economic Review 2009 7(1):123-143; doi:10.1093/ser/mwn018

This Article Abstract FREE Full Text (PDF) All Versions of this Article: 7/1/123    most recent mwn018v1 Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Add to My Personal Archive Download to citation manager Request Permissions Google Scholar Articles by Amable, B. Articles by Palombarini, S. Search for Related Content Social Bookmarking          What's this?

© The Author 2008. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

A neorealist approach to institutional change and the diversity of capitalism

Bruno Amable¹ and Stefano Palombarini²

¹ University of Paris I Panthéon-Sorbonne and CEPREMAP, Paris, France
² University of Paris 8, Paris, France

Correspondence: bruno.amable{at}ens.fr

This article proposes a theoretical approach to the political economy of institutional change and comparative capitalism. It argues that the firm-based approach of the Varieties of Capitalism literature cannot satisfactorily integrate the political aspects of institutional change and must in one way or another rely on some type of economic functionalism. By linking explicitly political strategies and demands for institutional change, a neorealist approach can exploit the concepts of complementarity and hierarchy of institutions. Different types of institutional change may take place in situations of political equilibrium, political crisis or systemic crisis.

Key Words: Capitalism • varieties of • institutional change • institutional complementarity • institutional political economy • political economy

JEL classification: B52 current heterodox approaches: institutional, evolutionary

	1. Introduction

TOP 1. Introduction 2. The limits of... 3. Basic principles of... 4. Institutions in neo-realist... 5. Institutional change in... 6. Conclusion Funding Notes References

 
There are two related aspects of the ‘mainstream’ economic approach to institutions underlying the recommendations made by international organizations such as, for instance, the Organisation for Economic Cooperation and Development and the World Bank (World Bank, 2006; OECD, 2007). The first one is analytical. Since it is presumed that an institutional configuration is optimal, institutional diversity is a problem that the theory cannot analyse. The persistence of diversity must be explained by factors that do not strictly belong to the realm of economics, e.g. politics and their influence on the degree of ‘imperfection’ of markets. The second aspect is the mainstream view's expression of implicit or explicit value judgements on existing institutional configurations. ‘Good’ institutions are held to be those that deliver a ‘good’ economic performance: e.g. high gross domestic product and productivity growth rates, low unemployment and high labour market participation, balanced current and foreign trade accounts, etc. The ‘bad’ institutions deliver exactly the opposite. These value judgements lead to policy recommendations: bad institutions call for structural reforms. Institutional change is then conceived of as a move towards best practice. The political economy aspect of reforms is therefore extremely simple: those that oppose institutional change are supposed to be dumb—because they fail to see that reforms may at first be painful but that they will pay off in the end—or wicked, because they want to protect ‘undue’ rents.

The current literature on comparative capitalism rejects the idea of a single optimal institutional configuration. The Varieties of Capitalism (VoC) approach developed in Hall and Soskice (2001) is famous for its consideration of two differentiated varieties, equally apt to deliver good economic performance. However, the two problems mentioned above are still present. The VoC framework based on a distinction between Liberal Market Economies (LMEs) and Coordinated Market Economies (CMEs) is able to explain more existing configurations than the mainstream approach, but it fails to account for a certain number of national cases which are sometimes awkwardly classified under the heading of ‘Mixed Market Economies’ (MMEs). More importantly, institutional change is still understood as a move towards best practice. Instead of a convergence toward the unique optimal model, a process of bifurcated convergence is expected: countries roughly classified as CMEs should become even more coordinated while competitive market coordination should become more compelling in LMEs. Regarding MMEs, only ‘politics’—the need to obtain political consent for reforms and governments responding to many other considerations than just economic efficiency—and limited rationality—the search for more efficient ways being complicated and uncertain—could prevent the move towards the poles represented by a ‘pure’ CME or LME (Hall and Soskice, 2003, p. 245). While less directly prescriptive than the mainstream approach, VoC admits implicit value judgements on institutions.

The aim of this article is to propose some elements towards the building of a theoretical framework for analysing institutional change from a comparative political economy perspective, avoiding the two problems faced by both the mainstream and VoC approaches. The need for theorizing institutional change has been acknowledged strongly by Streeck and Thelen (2005), particularly in order to go beyond the simple characterization of change as either ‘incremental’ or ‘disruptive’. The comparative capitalism literature usually classifies the former type as adaptive or reproductive, i.e. not threatening to the institutional structure. As a consequence, ‘real’ changes are often presented as belonging to the second type and seen as the outcome of mostly exogenous disruptions. The present article argues that a comparative political economy of capitalism requires that a link be made between institutional and political equilibriums (PEs) and therefore between institutional change and political change. Furthermore, PEs should be integrated into a theory of institutional change and not analysed as exogenous factors of hindrance, as is done in the mainstream approach. Such a framework should allow for the avoidance of several shortcomings found in the existing literature:

• The approach should be general enough to enable the analysis of a wide variety of institutional configurations; it should make it possible to avoid descriptive ‘theorizing’ and inductive categorization of actual institutional change;
  
• It is necessary to adopt a positive instead of an explicit or implicit normative approach to institutional change;
  
• It is important to clarify the definition of an institution (formal/informal) in order to understand what a model or VoC is; this is particularly necessary when one wants to assess whether the model has changed;¹
  
• An explicit theoretical framework should make it less difficult to grasp the interactions between political, social and economic dynamics;
  
• It should allow the theory to go beyond the question of the forms taken by institutional change² and address the question of the causes of change.
  

To build a theoretical framework for institutional change, it is argued that several levels must be distinguished:

1. Ideology and representations, which include but are not limited to discourse (Schmidt, 2007);
   
2. Demands (aims, preferences, expectations, etc.) of social actors and the ensuing strategies used to cope with them;
   
3. Political mediation. The logic and modalities of the elaboration of public policies must be specified if one wants to understand why institutional reforms may at a certain moment enter the political agenda;
   
4. The identification of social groups that benefit from the economic dynamics and whose interests are protected by public policy;
   
5. Institutions, defined as social rules and not as behaviour (i.e. they are not simply ‘practices’). Institutions are defined as ‘rules of the social game’ and differentiating them from agents' practices or strategies is indispensable.
   

The article is organized as follows. The next section argues that a theory of the diversity of capitalism must be based on a political theory of institutions, not on the competitive strategy of the representative firm. The following section proposes a set of general principles upon which a ‘neorealist’ comparative political economy of capitalism can be built, incorporating social conflict in the definition of institutions. A later section presents how institutional equilibrium can be conceived of in this theory, in relation to PE. The last section deals with institutional change and relates political stability (or lack thereof) to structural reforms and change.

	2. The limits of the firm-based approach

TOP 1. Introduction 2. The limits of... 3. Basic principles of... 4. Institutions in neo-realist... 5. Institutional change in... 6. Conclusion Funding Notes References

 
Hall and Soskice's (2001)³ VoC approach does not propose a theory of institutional change,⁴ but neither does it ignore the possibility of institutional change; indeed, it expects ‘corporate strategies, policies and institutions of each nation to evolve in response to the challenges they face’ (H&S, p. 54). Firms are the crucial actors of the economy, the key agents of adjustment (H&S, p. 6). A VoC is therefore a mode of interaction of the firm with its suppliers, clients, collaborators, and stakeholders as well as trade unions, business associations and governments. It is obvious that the firm considered in VoC is the representative firm of the economics literature, i.e. a profit-seeking agent that hires production factors. As a decision-taking agent, the firm is in fact management: in H&S's representation of bargaining, for instance, the firm represents one side of the bargaining, the unions or wage-earners being the other side.

This methodological assumption has important consequences for the conception of institutional change present in the VoC literature.

1. Making the firm (i.e. the management) the central agent of the theory implies that, logically prior to dealing with the problem of coordination with other agents in the economy, intra-firm conflict should be resolved and a compromise established. Absent this resolution, the ‘firm’ itself would not be defined as an individual agent. Another consequence is that the objectives of other agents (in particular workers) will always be conditioned by the within-firm compromise and indeed by the very definition of what the firm is. The expectations and demands of those agents in terms of public policy and institutional change will be taken to be defined by their relation to ‘the firm’. Such a restriction is not warranted even in a rational agent-based theory of institutional change. It makes it theoretically impossible to analyse processes of institutional change that do not take place at the level of the firm or which involve social demands not directly related to it.
   
2. Even when the State is mentioned, it is considered as an actor which can at best interact with the firm in the determination of institutions. The capacity of the State to impose rules on agents, based on the monopoly of legitimate violence, is neglected. This implies that the will of some agents to impose rules on other agents through the State is neglected as well. This neglect stems from the confusion between rules and practices (see the definition of institutions below) and leads to the overestimation of the importance of the interpretation made by firms in the process of institutional change (see the sources of institutional change below) in comparison with political reforms.
   

Whereas mainstream economics would predict that globalization, by strengthening the competitive pressure on firms, would lead to convergence towards the unique optimal model of capitalism, the VoC approach contends that it should intensify the existing differences between CMEs and LMEs. This theoretical prediction is, according to H&S, validated on several counts: there has not been an observable weakening of trade unions in industrialized countries, and the welfare state has not experienced massive retrenchment except in countries classified as LMEs, such as the UK. However, several facts fit less squarely with VoC's prediction: the intensification of social and political conflict over structural reforms in continental European countries that would be considered as CMEs by Hall and Soskice (Amable, 2003, 2007); and the attacks against the ‘German model’ launched by organized business in the past few years (Kinderman, 2005; Streeck, 2008). Part of the controversy surrounding this matter depends upon the definition of the ‘German model’, or more generally on the definition of a model of capitalism, i.e. the institutions that characterize it. If one defines the German model as a mix of works councils and sectoral bargaining, it may be stated that no major change has taken place, since key institutions have not been altered by globalization. If, on the other hand, one points to the important change in the area of corporate governance or to the labour market and welfare state reforms over the last decade, Germany cannot be characterized by its institutional stability (Beyer and Höpner, 2003; Streeck, 2008).

This debate raises a number of important questions that can only be clarified with the help of institutional theory, in particular the definition of what an institution is and in what way institutions and behaviours are related. Institutions in Hall and Thelen (2009) are defined of regularized practices with a rule-like quality in the sense that the actors expect the practices to be observed ‘as sets; and which, in some but not all, cases are supported by formal sanctions’ (p. 9). The institution is therefore a common practice rather than a rule since the presence of sanctions seems to be immaterial. This question of the mandatory character of institutional rules is also present in the example given by Hall and Thelen when they consider informal practices that have a conventional character ‘such as the expectation that firms will offer a certain number of apprenticeships’ (p. 9). In what way is this expectation an institution? Do firms feel compelled to offer a certain number of apprenticeships or is it a mere habit that could be changed overnight without any trouble if it turned out to be less profitable? How would other agents consider this change of behaviour, as a breach of the social contract or as a legitimate change of strategy? Answering all these questions would necessitate the clarification of the nature of the institution in question and the assessment of the role of sanctions in the stability of an institution. The confusion between practices and rules does not permit one to consider that agents could be forced to adopt a specific behaviour or at least be prevented from using some strategies instead of ‘freely’ choosing how to behave.

There are several other consequences of the adoption of such a definition of institutions. Institutional change is necessarily incremental since actual change involves a change in agents' practices. Hall and Thelen (2009) consider three modes of change: defection, reinterpretation and reform. The latter plays a minor role since institutions are identified by practices. Defection and reinterpretation are done at the initiative of agents; reform is supposed to have a more political nature. Reform is always conditioned to a change in interpretation since agents' defection or reinterpretation could provoke the failure of the reform. In fact, agents readjust to the new institutional equilibrium through changes in behaviour. Therefore, the success of reform depends on changes in agents' practices. Since no actor, not even the State, is able to impose a specific practice on firms, the success of a reform is always conditioned to the interpretation of firms: the role of the State is therefore considered as minor; it is at best an initiator of a process of institutional change that must in fine always be validated by firms' behaviour.

In order to be able to analyse the major role that the State can play in the evolution of a model of capitalism, it is necessary to differentiate the rules of the game, which prohibit certain practices under the threat of sanctions, from the strategies and practices of agents, which are chosen among those not prohibited by the State.

The definition of institutions as practices and the underestimation of the State's capacity to constrain actors' strategies through prohibition and sanctions are obstacles to the insertion of politics in the theoretical framework, which itself is necessary in order to understand institutional change in comparative political economy. For the VoC school, firms have the power and capacity of autonomous innovation that the State does not have. Furthermore, no theoretical element is given to analyse a possible initiative of the State in the area of institutional change (why does the State decide to initiate institutional reform at one moment rather than another?) or to interpret the major empirical fact that reforms affect several institutional areas at the same time. The functionalist hypothesis—which would imply the systematic attempt to reinforce the characteristics of the ‘pure’ varieties—is sometimes refused by VoC (e.g. Hall and Thelen, 2009), but is not replaced by an alternative hypothesis.

	3. Basic principles of a neo-realist approach to comparative political economy

TOP 1. Introduction 2. The limits of... 3. Basic principles of... 4. Institutions in neo-realist... 5. Institutional change in... 6. Conclusion Funding Notes References

 
This section argues that going beyond a ‘firm-based’ approach is possible and exposes some basic principles of a ‘neo-realist’ approach to comparative political economy.⁵ Classical realism in political philosophy, e.g. in the work of Machiavelli, Hobbes, and others, is to a certain extent based on ‘pessimistic’ views about human nature: men follow their passions and interests and are corruptible.⁶ A neorealist⁷ approach does not include metaphysical concepts such as human nature, but rather states that social (e.g. economic) differentiation explains agents' conflicting interests and social demands. The specific function of politics is to select among all social demands those that will be satisfied. If the logic of politics is not to contribute to the realization of a ‘common good’, the reason must not be found in a ‘bad’ human nature but in the limits of the possibility of satisfying different and sometimes contradictory demands.

The viability of a particular type of socio-economic model, e.g. a VoC, is supposed to depend not on the competitiveness of firms but on the capacity of the model to regulate social conflict. This conflict has its roots in the differentiation of the socio-economic interests of individual and collective agents and the heterogeneity of the social expectations and demands that follows from it. Social conflict cannot be abolished or eliminated; social expectations are diverse and largely contradictory, and the resources that the political system may use in an effort to regulate this conflict are limited. In other words, social conflict cannot be transcended but only partially and momentarily neutralized.

A PE will be defined as a situation where social conflict is regulated. This does not imply that all social demands are satisfied, but that there exists a situation where the contestation stemming from social groups whose demands have been disregarded (i.e. the ‘dominated’ groups) is limited to a minority position of the political representation space or repressed with the help of legitimate violence. ‘Dominant’ social groups, i.e. those whose demands are taken into account in the definition of public policy, form in such a situation a ‘Dominant Social Bloc’ (DSB). Therefore, social conflict is regulated and a PE exists when there is a stable DSB composed of social groups that support the strategy of political mediation implemented by political actors.

Ideology and mediation by political actors play an important role in this theoretical representation. Social expectations and demands are not conceived as the ‘natural’ reflection of the social position of agents in the socio-economic space, e.g. ‘workers’ or ‘managers’. Social expectations correspond to interests as agents perceive them. World views or ideologies are the expression of the differentiated socio-economic structure in heterogeneous social expectations. The role of political actors is to mediate a social compromise between these heterogeneous demands and select those that will be satisfied, through the implementation of specific policies or the design of particular institutions.

The idea that power cannot be exercised by brute force alone is an old Pascalian theme that can also be found in the works of Max Weber. For Gramsci (1975, 1977), there are two pillars to political leadership: hegemony and coercion. One characteristic of the capitalist order which differentiates it from pre-modern societies is the necessity that different social groups be involved in the development process, this necessity deriving from the need to constantly create new and growing markets. Such an involvement of diverse social groups cannot be achieved by coercion alone; hence the need for the development of a hegemonic culture in which the values of dominant groups become the common sense of dominated groups. The concepts of ‘symbolic power’ and ‘symbolic violence’ proposed by Pierre Bourdieu go further in this direction.⁸ Even a domination based on brute force always has a symbolic dimension. Compliance to a social order involves cognitive structures whose main principle is an ‘automatic’ incorporation of social structures under the guise of self-evidence. This is the basis for the emergence of a ‘logical’ or ‘moral’ conformism regarding how the world should be interpreted. The political struggle is a cognitive struggle ‘for the power to impose the legitimate vision of the social world’ (Bourdieu, 1997, p. 220), the ‘power to (re)make reality by preserving or altering the categories through which agents comprehend and construct that world’ (Wacquant, 2005, p. 3).

The role of politics is therefore not limited to political mediation: the fight for hegemony (world views, values, common sense, etc.) is crucial. Ideology is a political battle field. One may, for instance, consider the role of think tanks in the current conflict over structural reforms in Europe. If their aim is often presented as improving the quality of the debate over certain issues,⁹ their practical role is to supply arguments to one side of the debate and exert an influence on the issue of the ‘battle of ideas’. Think tanks contribute to structuring the debate on reforms for the popular press and more generally agents that have no direct access to academic debates, providing ready-made arguments and establishing de facto a distinction between ‘acceptable’ and ‘unacceptable’, ‘reasonable’ and ‘unreasonable’ opinions.

Ideologies should be analysed as historical facts in their role as instruments of domination. The role of ideology can be seen at two levels:

• In the perception that agents have of their own interests, i.e. in the formation of a certain world view;
  
• In the distinction between expectations and demands considered as ‘legitimate’ i.e. worthy of being satisfied through the implementation of public policies on the one hand, and ‘illegitimate’ demands whose satisfaction is beyond the action of public policies on the other hand.
  

Ideologies are therefore important in the very definition of social groups. These groups are not the ‘natural’ expression of objective differences of interests, but a social and political construction made under the influence of ideologies which use cognitive structures which themselves reflect the position of agents in a given field.¹⁰ Social groups are composed of heterogeneous agents brought together by the perception of common interests and the expression of similar demands. They are therefore liable to be changed and restructured under the influence of social or economic transformations as well as changes in ideologies. But this should not be taken as the affirmation of the primacy of ‘ideas’ over interests, since agents' cognitive structures reflect the incorporation of a social domination and thus the ‘objective’ structures of domination.

The role of political leadership is to select among social demands those that will be satisfied and those that will be left unsatisfied. Several parameters influence this political decision: resource availability, the macroeconomic context, the specific content of the demands and their reciprocal compatibility. But the main criterion that political actors take into account is the ability of the different social groups to supply electoral and more generally political support in exchange for the satisfaction of their demands. Political actors, e.g. parties, need support in order to strengthen their position in the competitive field of partisan representation. A social conflict is regulated (i.e. a DSB exists) when the strategy of the governing party or coalition permits it to obtain the support necessary for political validation, i.e. when social and political contestation is not sufficient to destabilize political leadership or force it to change its course.

In such a perspective, firms' competitiveness is not the ultimate criterion of viability for a social model. It nevertheless plays an indirect role in its contribution to increasing the economic resources that political actors may use to satisfy social demands, and also through the impact that competitiveness has on the definition of social demands. Therefore, firms' competitiveness and more generally the macroeconomic situation condition the socio-political dynamics but do not strictly determine it. The 1960s was a period of fast growth and low employment in continental Europe; yet the level of contestation of the social order¹¹ was far more intense than during the low-growth decades that followed. Also, the mediocre economic situation at the beginning of the 1970s did not trigger a wave of structural reforms in continental Europe.

	4. Institutions in neo-realist political economy

TOP 1. Introduction 2. The limits of... 3. Basic principles of... 4. Institutions in neo-realist... 5. Institutional change in... 6. Conclusion Funding Notes References

 
In the neo-realist approach to institutional change, it is important to differentiate betweens institutions, i.e. rules, and agents' behaviour and strategies.¹² Institutions are the rules of the (social) game, and their function is to partition the strategy space between socially accepted strategies and socially condemned ones. The existence of an institution implies that of a sanction. An institution where the sanction is explicitly incorporated in the rule is a formal institution; an institution without formal sanctions is considered as informal (a social convention).

As rules of the social game, institutions play a major role in the possible regulation of social conflict. Institutions (a) contribute to structuring socio-economic relations; (b) organize the political representation space, i.e. the space within which political supply will compete; (c) delineate, through the constraints that they define, the strategy space available to political actors in their search for successful mediation; and (d) condition the impact of public policies on economic dynamics and, consequently, on social demands. Thus, the interaction between differentiated social demands and political mediation, which may lead to the formation of a DSB (and therefore the regulation of social conflict), is structured by institutions.

4.1 Breaking from economic functionalism
The emergence of institutions cannot be analysed in direct reference to the functions institutions perform as rules of the social game. Castoriadis (1975) mentions the existence of outcomes that nobody ever wanted as such, even if they appear ‘coherent’ in a certain way. They somehow ‘make sense’ and seem to follow a logic which is neither subjective (carried by a conscience) nor objective (such as a law of nature). There are many consequences of the rules which have never been made explicit in the first place and nevertheless play a significant role in social interactions. They contribute to the structuring of interactions in a way that is not required by the functionality of social relations but that does not contradict it either, and they can drive society in a direction that functionality left undetermined or create effects that feed back into functionality. On such matters, the neorealist approach differs from the political economy theories which share with mainstream economics what Castoriadis calls the ‘economic functional’ approach: the existence of the institution as well as its characteristics (up to the tiniest details) are explained in reference to its social function.

The relation between institutions and social conflict should not be understood in a functional way in the sense that institutions would have the task of regulating social conflict and that their existence would be justified accordingly. Institutions contribute de facto to regulating social conflict; however, they also structure social conflict. Therefore, it is impossible to conceive of social conflict independently from institutions. There is no ‘pure’ society or economy independent of institutions. Thus, there is no ‘pure’ social conflict that would find expression in institutions independently from them.

The various conditions allowing the emergence of institutions may be varied, but most of them can be thought of as the result of a socio-political compromise over the rules of the social game, a way of settling fundamental conflicts of interest between agents. This applies most clearly to institutions explicitly validated by a formal political process, as in the case of most formal institutions such as laws and regulations. It applies also to institutions that appear to emerge from interindividual or ‘micro-level’ interactions (Amable, 2003). Whether an informal institution is questioned or not may be interpreted in terms of a balance of power (even the power of organization) between those that benefit from the rule and those that do not. Institutional inertia is linked to the fact that institutions represent a compromise in socio-political conflicts. Questioning an institution means reopening these conflicts.

The break from the ‘economic functional’ approach derives from two distinct considerations. First, the logic of functioning of the institution may become autonomous with respect to the precise conditions of the emergence of the institution. Second, the emergence of an institution corresponds to a socio-political compromise, not to a unique end.

4.2 Complementarity and hierarchy of institutions
There are two fundamental concepts in the analysis of the impact of institutions on the regulation of social conflict: complementarity and hierarchy.¹³ It is useful here to consider these notions from several points of view. Social groups have demands and expectations which they consider as coherent with their specific interests. Political actors have their own objective, which is to devise a political strategy permitting the formation of a global social compromise strong enough to be politically stable. Of course, heterogeneity and conflict are present on both the supply and the demand sides of the ‘political exchange market’: varied and partly incompatible social demands as well as competition in political supply.

From a social group's point of view, two institutions are complementary when their joint presence favours the protection of the interests that define the groups. From the point of view of a given political strategy, complementarity is defined in reference to the formation of a specific DSB. The joint presence of institutions should allow the widening of the space for political mediation between groups liable to form the DSB. These two types of complementarity are not necessarily associated with the same configuration of institutions. From the point of view of a social group composed of firms' managers or owners, for instance, deregulated labour markets may be complementary with protected or regulated product markets since both institutional forms may be perceived as jointly increasing the well-being of this group. On the other hand, a complementarity between deregulated labour markets and deregulated product markets may exist from the point of view of political mediation, since such an institutional strategy could allow for the widening of the dominant socio-political alliance beyond firms' owners and managers and in the direction of some groups of workers, e.g. skilled labour, who could benefit from a neoliberal model of capitalism in terms of high wages and career progression opportunities. Whereas business' demands would be institutions favouring low wages, high prices and high profits, workers' demands would be in favour of high wages and low prices. A combination of deregulated product markets (low prices) and deregulated labour markets (low wages for the low-skilled, high wages for the high-skilled) could enable the emergence of a DSB excluding low-wage workers.

The strategies of political actors lead them to adopt combinations of policies and institutions that are complementary to their own goals. Two institutions in Italy at the beginning of the 1980s were complementary in this respect: quasi-flexible exchange rates (the wide margins of the European Monetary System) and the scala mobile, i.e. the indexing of wages on inflation (Palombarini, 2001, 2003). The combination of both institutions allowed for an expansionary budget policy that was crucial in the political mediation process. Budget deficits led to some degree of social conflict and thus inflation. However, the quasi-flexibility of the exchange rate allowed for the preservation of external competitiveness, which satisfied exporting firms' managers and owners, and wage indexation reduced the hostility of workers, some groups of wage-earners making up part of the dominant bloc.

The hierarchy among institutions can be defined with respect to the importance of an institution for a social group or for the stability of a political compromise. For a socio-political group, hierarchically superior institutions are those that matter most for the interests of the group. This hierarchy is based on the conformity, contradiction or neutrality of the institution with respect to the interests that define the social group. For instance, although the continental European model of capitalism is based on some degree of employment protection, many firm owners and managers have put labour market flexibility and the dismantling of employment protection regulations at the top of the list of demands addressed to the political system. This is, for instance, the case in France, with the joint initiative of the large firms' business organization MEDEF and the small business union CGPME calling for the ‘modernization’ of employment legislation, i.e. making lay-offs easier.

Hierarchy is nevertheless a more interesting concept when one takes the point of view of political mediation. What matters here are the formation of social alliances and the establishment of a DSB. In a PE, an institution is all the more important if its questioning or alteration would imply challenges to the existence of the dominant compromise. The institutions of the wage–labour nexus, including social protection, were without doubt on top of the institutional hierarchy in many countries during the Fordist period (Boyer and Mistral, 1983; Delorme and André, 1983), allowing a compromise between capital and labour based on a certain redistribution of productivity gains to wage earners in exchange for the adoption of production methods that made these productivity gains possible. This compromise resulted in a macroeconomic dynamics based on expanding markets fuelled by a demand that could grow rapidly thanks to real wage increases. Such a compromise could be the basis of a social alliance between a large part of business, and particularly large firms, as well as some parts of labour. In equilibrium, the dominant compromise and hierarchically superior institutions validate each other; institutions are instrumental in the establishment of the compromise and, in return, dominant groups politically validate these institutions.

	5. Institutional change in the neorealist approach

TOP 1. Introduction 2. The limits of... 3. Basic principles of... 4. Institutions in neo-realist... 5. Institutional change in... 6. Conclusion Funding Notes References

 
The distinction between a PE and a crisis situation must not be understood as an opposition between a phase of absolute institutional stability and a phase of complete upheaval in the institutional structure. Crisis periods are in principle characterized by a more intense ‘reform’ activity, but some institutional change takes place in equilibrium situations too. Besides, institutional change in periods of crisis must not be considered as ‘chaotic’. On the contrary, one of the aims of our approach is to understand the logic behind institutional change in periods of political crisis.

In order to analyse institutional change driven by public policies both in situations of PE and political crisis, it is necessary to consider that it can have its roots in two different types of demands. On the one hand, political leadership may include an institutional reform in its programme because it corresponds to a demand of one or several social groups. On the other hand, political leadership may include in their strategy the evolution of an institution because this would broaden the space for mediation between different interests and demands. Institutional change would then be instrumental in the shaping of a new social compromise or the strengthening of the existing one. These two sources of institutional change correspond to the two types of institutional hierarchy defined in the previous section.

5.1 Political equilibrium
One may briefly return to the concept of PE. It is defined as the existence of a DSB and is determined by the interaction between ideology, political mediation and some institutions, those that create room for political mediation between certain interests. Such institutions will be hierarchically superior (from the political mediation point of view) for the stability of the DSB.

This does not mean that these institutions will not be altered or reformed. The demand for change may come from one or several dominant groups. The situation would then involve some contradictions. One or several dominant groups could ask for change concerning an institution functional to the existence of a mediation space between dominant interests. One may also envisage the possibility of some institutional change at the initiative of political leadership in order to warrant the future viability of the dominant compromise to which one or several dominant groups would be opposed.

When the hierarchy of institutions of some dominant groups is in direct contradiction with the hierarchy based on the necessary requirements for mediation within the DSB, two possible outcomes can be considered. If political leadership gives in to groups' demands, the space for political mediation within the DSB will eventually be reduced or even obliterated, which could lead to an endogenous political crisis. This could, for instance, correspond to the situation of the demise of a ‘social-democratic’ alliance between business and labour based on some compromise between the demands of workers for social protection and the demands of business for wage moderation and/or high productivity gains. Globalization or European integration may, for instance, give firms new opportunities for relocation, or international competition may lead business to express new demands regarding the conditions necessary for high profitability.¹⁴ This would imply that business would express strong demands for welfare state retrenchment or a greater flexibility in the employment relationship. Satisfying these demands to a large extent may lead the other participants in the dominant alliance to reconsider their political support for the dominant compromise. This configuration fits with the evolution of the socio-political compromise and the emergence of a political crisis in France (Guillaud and Palombarini, 2006).¹⁵ One could also interpret the German case presented in Streeck (2008) in this manner. The preservation of the alliance between capital and labour during the 1980s necessitated increasing public social expenditure, for instance to pay for the early retirement policy. This policy gradually led to a rift between medium-sized and large firms that progressively pushed the former outside of the dominant alliance.

A second possibility is for political leadership to sacrifice the most immediate demands of one or more dominant group(s) in order to secure the viability of the DSB. This case could characterize the reconstruction of the former DSB as well as the building of a new one in case of political crisis. The analysis of the building of the welfare state made by Poulantzas (1971) could correspond to such a situation: the State sacrifices the short-term interests of some fractions of the dominant class in order to protect the long-term interests of the dominant class as a whole. However, in his theoretical work, Poulantzas considers that every institutional change corresponds to such a configuration. Besides, he conceives the action of the State as an attempt to protect the interests of the dominant class, whereas the approach presented in this article is concerned with the building of a compromise between conflicting interests in order to obtain political support. The bargaining power of political leadership vis-à-vis the dominant groups as well as the relative power of the different groups will determine whether the requirements of political mediation or the demands of the dominant groups will prevail. The question for political leadership is whether it can afford to neglect a demand emanating from a dominant group for the sake of the viability of the DSB. Neglecting this demand would imply risking the loss of political support; satisfying it could eventually lead to the dissolution of the DSB and to a political crisis. The issue here is not limited to a short term/long term trade-off.

Once again, the German case could serve as an illustration of such a configuration. The mid-1990s attempt of the Kohl government to preserve the capital–labour alliance under new conditions, less favourable to unions, failed in the general election that followed. The cutbacks in social security benefits and contributions only partly succeeded: small-size firms supported the dominant alliance but unions were pushed outside of it. The same type of policy implemented by the red–green Schröder government eventually produced the same result.

5.3 Political crisis, systemic crisis
We define a political crisis as the breaking-up of the DSB. There exists a political crisis when there is no room for political mediation between dominant social groups in a given institutional structure. The crisis may have several causes. It may be the consequence of institutional change taking place at another level than that of the (national) political system, for instance at the level of the firm, when change in conventions threatens the stability of existing institutions¹⁶ or at the supranational level.¹⁷ It may also result from a deliberate action, aiming to satisfy demands coming from some groups within the DSB. The breaking-up of the equilibrium may be the consequence of a change in ideology or an alteration of the very configuration of socio-economic interests. As mentioned previously, heterogeneity exists within groups, and this heterogeneity evolves according to the transformations affecting the economy. An increased differentiation of interests may threaten the stability of some social groups and hence the stability of a DSB.

There is no guaranteed solution to a situation of political crisis. The existing institutional structure may prevent not only the renewing of the former DSB but also the emergence of any new dominant bloc. One may therefore make a distinction between a situation of political crisis, corresponding to the break-up of a given DSB, and a situation of systemic crisis, in which political actors cannot find any strategies to aggregate a social bloc that could become dominant. Such a situation is marked by a high degree of instability. No political strategy is able to generate the political support it needs to stabilize a certain political leadership, as for instance during the Italian ‘transition’ (1992–2008), and no institutional reform programme is able to find sufficient socio-political support, as for instance was the case in Continental Europe (e.g. France) during the early 2000s.

In a situation of systemic crisis, any strategy aiming to reconstruct or stabilize the former DSB or to form a new DSB must include some institutional change. This is a period in which political leadership is bound to intervene more directly in order to find a way to aggregate enough groups to form a new bloc. This intervention could also lead to the exacerbation of the situation of some groups and threaten their existence as such. The labour market and welfare reforms implemented in some continental European countries at the beginning of the 2000s have sometimes threatened the role of trade unions as managing partners in social security systems. This change threatens the very definition of labour as a socio-political group, particularly if the reforms imply a system change from corporatism to pluralism.

Institutional change in a situation of systemic crisis may be at the root of several conflicts, and in particular conflict with groups that had settled the institutionalized compromise in areas where change is taking place. These groups do not necessarily form part of the DSB. Also, the expectations of the groups which should be part of the DSB and the reforms initiated by political leadership may not be fully compatible. Nevertheless, one may envisage that in a crisis situation the contradiction between groups' demands and the requirements of political mediation should be solved more easily in favour of the latter. In equilibrium, a contradiction is possible between the immediate demands of dominant groups and the eventual validity of the DSB. In contrast, in a situation of crisis, the composition of the DSB is not determined. On the political supply side, several strategies for recomposing social alliances compete with each other. How social groups, which may find themselves outside of the dominant alliance after the crisis is resolved and when a new DSB emerges, will react to institutional change depends on their political and strategic capabilities and their assessment of the trade-off between short-term losses and potential long-term gains. If the objective is to be part of the new DSB and if the groups are able to implement a trade-off strategy, they may be likely to accept institutional reforms detrimental to their short-term interests in order not to be excluded from the DSB. An example of such a situation is the acceptance by a large part of the Italian wage-earners of a series of labour market and pension system reforms in the 1990s (Palombarini, 2003). These reforms were detrimental to the interest of wage earners but functional to the building of an alliance between large firms and workers, a so-called ‘producers’ alliance'. This project nevertheless failed against the one proposed by the right wing.

So far institutional change stemming from a direct contradiction between institutional hierarchies has been mentioned, i.e. the hierarchy corresponding to the requirements of political mediation and that corresponding to the interests of some dominant groups. This is the case when some institution would be on top of both hierarchies, but the demands regarding its evolution would be different and even contradictory. In a PE or in a crisis, some situations are easier to analyse. Political leadership would not have trouble integrating institutional change in the following situations: (a) the change corresponds to demands from groups that already belong to the DSB (in a situation of PE) or are liable to become part of the new DSB once it is built by a certain political strategy (in a situation of political crisis); and (b) the change does not represent a problem for or even facilitates the mediation between the different interests represented within the dominant alliance.

Furthermore, a given institutional reform may become important from the point of view of the political leadership if it makes mediation between different groups easier, even if these groups have no specific demands in the area of the reform. One may thus understand the importance given to Italy's participation in the European Monetary Unification by the first Prodi government in Italy (1996–1998). None of the social groups that the centre-left wanted to include in the ‘producers’ alliance' expressed a clear demand either for or against the immediate adoption of the Euro. However, his objective supplied the framework for the ‘concertation’ necessary for the producers' alliance. Concertation was the key element in the strategy of political mediation of the Italian centre-left (Palombarini, 2003).

	6. Conclusion

TOP 1. Introduction 2. The limits of... 3. Basic principles of... 4. Institutions in neo-realist... 5. Institutional change in... 6. Conclusion Funding Notes References

 
To sum up, and limiting oneself to institutional change resulting from a deliberate political action, several cases may be considered in different situations.

• In a PE
  1. Institutional change may be functional to the future viability of the dominant compromise. If this change is compatible with dominant groups' demands, it will most likely take place. However, if this change contradicts the demands of one or more group(s) within the DSB, two possible outcomes exist. The relative bargaining power is such that political leadership may, at least temporarily, relinquish support from the groups most hostile to change. In this case, change will take place. If on the other hand political leadership cannot afford to lose the support of groups hostile to change, it will give up the reform plans. Such a configuration may ultimately lead to an endogenous political crisis.
     
  2. Institutional change may be the answer to demands from some dominant groups. If it does not threaten political mediation between groups participating in the DSB, it will most likely take place. If this is not the case, one has a contradiction of the same type as the one mentioned above. Either the political leadership is able to renounce the support from change-demanding groups, at least in the short term, to preserve the viability of the DSB, or it must bow down to the demands of these groups and such institutional change may be at the root of a political crisis.
     
  3. Institutional change may also neither directly respond to the most important demands of the dominant groups nor cater to the requirements of political mediation between the DSB's groups. This could concern an institution at the bottom of both hierarchies (dominant groups and political leadership). Change could correspond to a demand from some dominated groups. The political leadership could answer favourably such demands in order to widen its social base and possibly include new groups in the DSB.
     
  
  
• In a situation of crisis (political or systemic)
  1. Institutional change may correspond to the attempt to reopen a mediation space between groups belonging to the former DSB. The chances of success of such political strategies depend on the DSB groups' strategic capabilities and their assessment of what their ‘outside option’ could be. If groups rightly or wrongly believe that it is possible for them to stay within the DSB and not give in too much in terms of concessions to change, a political strategy based on institutional change going against their direct interests is bound to fail. In such a situation, the political leadership would aggravate the political crisis by proposing institutional change. If on the other hand the main objective of these groups is to stay within a DSB, they may be willing to concede more, and institutional reforms proposed by the political leadership would help solve the crisis.
     
  2. Institutional change may be an attempt to build a new DSB. Political strategies will have better chances of success when they target a social alliance such that the corresponding institutional hierarchies are not in contradiction with one another. This means that institutional changes compatible with the interests of the potential DSB member groups are also able to open a mediation space between these interests.
     
  
  

	Funding

TOP 1. Introduction 2. The limits of... 3. Basic principles of... 4. Institutions in neo-realist... 5. Institutional change in... 6. Conclusion Funding Notes References

 
This research was supported by funds from the ESEMK (European Socio Economic Model of a Knowledge-Based Society) project (European Commission Framework Program 6).

	Notes

TOP 1. Introduction 2. The limits of... 3. Basic principles of... 4. Institutions in neo-realist... 5. Institutional change in... 6. Conclusion Funding Notes References

 
¹ See, for instance, Kindermann (2005) versus Hall and Soskice (2001) on the issue of the change/stability of the German model.

² For instance, the question of the existence of ‘path dependence’ (Crouch, 2005) or the classification of change as displacement, layering, drift, conversion or exhaustion (Streeck and Thelen, 2005).

³ Hereafter referred to as H&S.

⁴ ‘Our analysis ... was not meant to be ... a full explanation for the origins and persistence of the institutions of the political economy’ (Hall and Soskice, 2003, p. 248).

⁵ See also Amable and Palombarini (2005).

⁶ As Spinoza wrote in his Political Treatise: ‘vices will exist, while men do’ (Chapter I, 2).

⁷ In the theory of international relations, neorealism refers to a systemic approach that considers structural constraints on States' strategies (Waltz, 1979). However, the definition we adopt is that of Zolo (1992).

⁸ Bourdieu (1997).

⁹ This is, for instance, the purported aim of the Centre for European Reform, a ‘pro-European’ think tank. In the same manner, the French think tank Telos aims at being a link between ‘intellectuals’ and media or the general public. Another influential think tank, La république des idées, describes itself as a place for the production and exchange of ‘new’ ideas in Europe and in the world.

¹⁰ Gramsci mentions an ‘old forgotten Marxist thesis’: men acquire the conscience of the fundamental conflicts on the field of ideologies. Bourdieu insists on the importance of the dispositions of agents: schemata of perceptions, appreciation and action deposited inside them.

¹¹ Strikes, strength of contestation of traditional parties or unions, etc.

¹² A point also stressed in Amable (2003) and Streeck and Thelen (2005).

¹³ Amable (2003, chapter 2).

¹⁴ Amable and Gatti (2007).

¹⁵ On the case of Germany, see Streeck (2008).

¹⁶ Local or firm-level agreements over working hours have bypassed and indeed threatened the national labour legislation in France during the past few years. Such agreements, reflecting the local balance of power between business and workers as well as the differentiation of interests among workers, have made the position of opponents to labour legislation reforms more fragile.

¹⁷ A large part of legislative activity in EU Member countries is the mere ‘translation’ of European law into national law. Several international treaties limit or define the possibilities open to public action at the national level (WTO, etc.). The political game at the supranational level involves different actors than at the national or local level, but it is not independent of the characteristics of the political equilibrium. For several institutional areas, a supranational agreement may be the way to bypass the national compromise or modify the conditions in which this compromise is reached by limiting the possibilities open to some social groups while giving new opportunities to other groups. However, as long as the nation-state exists, the necessity for the political leadership to obtain national political support cannot be ignored.

	References

TOP 1. Introduction 2. The limits of... 3. Basic principles of... 4. Institutions in neo-realist... 5. Institutional change in... 6. Conclusion Funding Notes References

 

Amable B. The Diversity of Modern Capitalism (2003) Oxford, UK: Oxford University Press.

Amable B. La fin du Modèle Européen? Revue d'Economie Politique (2007) 117:551–575.

Amable B., Gatti D. Unemployment, and the politics of redistribution and employment protection. (2007) Paper presented at the ECPR International Conference, September 2007: Pisa.

Amable B., Palombarini S. L'économie Politique n'est pas une Science Morale (2005) Paris: Raisons d'agir.

Beyer J., Höpner M. The Disintegration of Organised Capitalism: German Corporate Governance in the 1990s. West European Politics (2003) 26:179–198.[CrossRef][Web of Science]

Bourdieu P. Méditations Pascaliennes (1997) Paris: Seuil.

Boyer R., Mistral J. Accumulation, Inflation et Crise (1983) Paris: Presses Universitaires de France.

Castoriadis C. L'institution Imaginaire de la Société (1975) Paris: Points Seuil.

Crouch C. Capitalist Diversity and Change. Recombinant Governance and Institutional Entrepreneurs (2005) Oxford, UK: Oxford University Press.

Deeg R., Jackson G. Towards a more Dynamic Theory of Comparative Capitalism. Socio-Economic Review (2006) 5:149–179.

Delorme R., André C. L'Etat et L'économie (1983) Paris: Seuil.

Gramsci A. Quaderni del Carcere (1975) Torino: Einaudi. 1977.

Guillaud E., Palombarini S. Evolution des Attentes Sociales et Comportement Electoral: France. (2006) Paris: Paris School of Economics. 1978–2002. Working Paper 2006-37.

Hall P., Soskice D. Introduction. In: Varieties of Capitalism—Hall P., Soskice D., eds. (2001) Oxford, UK: Oxford University Press.

Hall P., Soskice D. Varieties of Capitalism and institutional Change: A Response to Three Critics. Comparative European Politics (2003) 1:241–250.[CrossRef]

Hall P., Taylor R. Political Science and the Three New Institutionalisms. Political Studies (1996) XLIV:936–957.

Hall P., Thelen K. Institutional Change in Varieties of Capitalism. Socio-Economic Review (2009) 7:7–34.

Kinderman D. Pressure from without, Subversion from within: The Two-Pronged German Employer Offensive. Comparative European Politics (2005) 3:432–463.[CrossRef]

OECD. Economic Policy Reforms. Going for Growth (2007) Paris: OECD.

Palombarini S. La Rupture du Compromise Social Italien. Un Essai de Macroéconomie Politique (2001) Paris: Editions du CNRS.

Palombarini S. Dalla Crisi Politica alla Crisi Sistemica. Interessi Sociali e Mediazione Pubblica Nell'italia Contemporanea (2003) Milan: Franco Angeli.

Poulantzas N. Pouvoir politique et classes sociales (1971) Paris: Maspero.

Schmidt V. Bringing the State Back into the Varieties of Capitalism and Discourse Back into the Explanation of Change. (2007) Center for European Studies Program for the Study of Germany and Europe Working Paper Series 07.3.

Streeck W. Bringing Capitalism Back. In: Institutional Change in the German Political Economy (2008) Cologne: Max Planck Institute for the Study of Societies. draft.

Streeck W., Thelen K. Introduction: Institutional Change in Advanced Political Economies. In: Beyond Continuity: Institutional Change in Advanced Political Economies—Streeck W., Thelen K., eds. (2005) Oxford, UK: Oxford University Press.

Wacquant L. The Mystery of Ministry: Pierre Bourdieu and Democratic Politics (2005) Cambridge, UK: Polity Press.

Waltz K. Theory of International Politics (1979) New York, NY: McGraw-Hill.

World Bank. Doing Business 2007. How to reform (2006) Washington, D.C: The World Bank and the International Finance Corporation.

Zolo D. Il Principato Democratico (1992) Feltrinelli: Milan.

CiteULike    Connotea    Del.icio.us    What's this?

This Article Abstract FREE Full Text (PDF) All Versions of this Article: 7/1/123    most recent mwn018v1 Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Add to My Personal Archive Download to citation manager Request Permissions Google Scholar Articles by Amable, B. Articles by Palombarini, S. Search for Related Content Social Bookmarking          What's this?

Online ISSN 1475-147X - Print ISSN 1475-1461

Copyright © 2009 Society for the Advancement of Socio-Economics and Oxford University Press

Oxford Journals Oxford University Press

• Site Map
• Privacy Policy
• Frequently Asked Questions

Other Oxford University Press sites: Oxford University Press Oxford Journals China Oxford Journals Japan American National Biography Booksellers' Information Service Children's Fiction and Poetry Children's Reference Corporate & Special Sales Dictionaries Dictionary of National Biography Digital Reference English Language Teaching Higher Education Textbooks Humanities International Education Unit Law Medicine Music Online Products Oxford English Dictionary Reference Rights and Permissions Science School Books Social Sciences Very Short Introductions World's Classics