Economic Degrowth and the Collapse of Institutional Order : Theory and Propositions

This is a self-archived version of an original article. This version may differ from the original in pagination and typographic details. Author(s): Title: Year: Version: Copyright: Rights: Rights url: Please cite the original version: CC BY-NC-ND 4.0 https://creativecommons.org/licenses/by-nc-nd/4.0/ Economic Degrowth and the Collapse of Institutional Order : Theory and Propositions © Kirjoittajat 2022 Published version Lamberg, Juha-Antti; Nykänen, Nooa; Taskinen, Jarmo Lamberg, J.-A., Nykänen, N., & Taskinen, J. (2022). Economic Degrowth and the Collapse of Institutional Order : Theory and Propositions. Annales Academiae Scientiarum Fennicae, 1(1), 10-27. https://doi.org/10.57048/aasf.122842 2022 #1 10 ECONOMIC DEGROWTH AND THE COLLAPSE OF INSTITUTIONAL ORDER: THEORY AND PROPOSITIONS Economic Degrowth and the Collapse of Institutional Order: Theory and Propositions Juha-Antti Lamberg Nooa Nykänen Jarmo Taskinen 11 ECONOMIC DEGROWTH AND THE COLLAPSE OF INSTITUTIONAL ORDER: THEORY AND PROPOSITIONS 12 ECONOMIC DEGROWTH AND THE COLLAPSE OF INSTITUTIONAL ORDER: THEORY AND PROPOSITIONS 13 ECONOMIC DEGROWTH AND THE COLLAPSE OF INSTITUTIONAL ORDER: THEORY AND PROPOSITIONS Abstract Integrating insights from new institutional economics and studies on the collapse of past empires, we sketch a process model that links economic degrowth to the collapse of institutional orders. Our thought experiment starts from emphasizing the importance of institutions and enforcement mechanisms in maintaining a sufficient level of economic activity to sustain public costs. We flip this established logic and elucidate the negative role of economic degrowth in the weakening of the public sector’s ability to enforce institutional rules. Internal and external shocks further shake the stability of the institutional order and, at some point, individuals’ belief in institutional rules and norms weakens, resulting in system-wide collapse of the institutional order. We use historical literature on the collapse of Roman Empire as an “experimental prototype” (Meyer, Gaba, & Colwell, 2005: 471) to inspire and illustrate our thought experiment. 14 ECONOMIC DEGROWTH AND THE COLLAPSE OF INSTITUTIONAL ORDER: THEORY AND PROPOSITIONS 1. Introduction Previous studies in institutional economics (e.g., Acemoglu, Johnson & Robinson, 2005) and economic history (Broadberry & Wallis, 2017; Persson & Sharp, 2015) have highlighted the efficiency of institutional order – the interplay of transparent and predictable formal and informal rules and enforcement mechanisms resolving disputes (North, 1990) – as a necessary condition for long-term economic growth (Acemoglu & Robinson, 2012). We turn this perspective upside down and suggest that the functioning of institutional orders might be reciprocally conditioned by economic growth. Accordingly, economic degrowth (cf., Kallis et. al., 2018) – defined as a long-term economic downturn – may be an existential crisis for the maintenance of institutional orders. The collapse of institutional orders is far less studied than is the link between institutions and economic growth. The topic is indirectly touched upon in studies on collapses of political systems (e.g., Yoffee & Cowgill, 1988, Tainter, 2008), which consistently report how at some point individuals and organizations stop believing in the value and utility of established rules and norms, the institutional order of societies. Translated into the language of organization studies, accounts from the corpus of collapse studies reflect “…the erosion or discontinuity of an institutionalized organizational activity or practice” (Oliver, 1992: 563). Earlier studies on the evolution of institutional orders (e.g., Hodgson, 2009; North, 1990) and collapses of political systems have remained separate streams of research. Meyer, Gaba, and Colwell (2005: 456) have observed that “…researchers acknowledge fieldwide flux, emergence, convergence, and collapse, but sidestep direct investigations of the causes and dynamic processes, leaving these efforts to political scientists and institutional economists.” In this spirit and inspired by other similar approaches to organizational theorizing (e.g., Clemente, Durand, & Roulet, 2017), our motivation is to integrate these streams of research and study the collapse process of institutional order. Existing studies and conceptual papers on the erosion of institutional orders mainly focus on micro-level practices (Maguire & Hardy, 2009; Ahmadjian & Robinson, 2001) and organizational forms (Davis, Diekmann, & Tinsley, 1994) as research objects (i.e., as something that decays without being simply replaced with an alternative institutional order). Scholars oriented to new institutional economics The collapse of institutional orders is far less studied than is the link between institutions and economic growth. 15 ECONOMIC DEGROWTH AND THE COLLAPSE OF INSTITUTIONAL ORDER: THEORY AND PROPOSITIONS (Bjørnskov & Foss, 2016) and new institutionalism (Ingram & Silverman, 2000) share similar research interests while working with a different conceptual vocabulary and often focusing on more macro-level institutional change. Nobel laureate Douglass C. North (1990), for example, worked with a theoretical model in which the emergence and erosion of institutions are equally possible depending on the strength of enforcement mechanisms and the prices of transactions. More rarely, as in Ahmadjian and Robinson (2001) and Allen and Heldring (2022), economic and institutional pressures are analyzed as dynamic interactions within a political system – a logic we follow in this essay. Building on collapse studies and assumptions from theoretical work on institutional change, we set out propositions to outline the negative effect of economic degrowth on the public sector’s ability to enforce institutional rules, which can result in the potential rise of private ordering as a substitute for state-centered institutional order. We integrate these effects into a theoretical model that explicates the mutual roles of institutional orders and the availability of economic resources. In particular, the model expands current understanding by identifying the mechanisms and processes preceding the collapse of institutional orders. Our model may be used for simulations and counterfactual modelling, thus becoming a starting point for an improved understanding of the relationship between economic growth and the development and maintenance of institutional order, and the possibilities for management interventions to prevent chaotic transformations and collapses. 2. Collapse in the Prior Literature We follow Yoffee and Cowgill’s (1988) conceptual definitions of collapse. Though our focus is on the collapse of institutional orders, it is important to distinguish the other levels of analysis since they indirectly touch upon institutional orders as well: civilizations, societies, and political systems. First, civilizations are broad entities (e.g., modern Western democracies) that consist of multiple human societies linked through economic and social interactions. These entities are geographically delimited and may retain distinctive institutional systems. Overall, collapses of civilizations that indicate a sudden or rapid disappearance of distinct cultural entities are scarce. Second, societies (e.g., nation-states) are homogenous ethnic groups or entities organized under one political, economic, and institutional system. A breakdown of society, often understood as a classic case of collapse, is not synonymous with a collapse of civilization since the cultural traditions of civilization are not customarily restricted to a single state and may be practiced in other societies within the sphere of influence (Frank & Gills, 1993). The third type of collapse is that of a political system, which is defined as an entity under a unified institutional order (e.g., the Roman Empire). This unified system may include multiple societies with distinct ethnic or linguistic nationalities that are institutionally and politically integrated by a centralized source of power. Collapses of political systems typically result in the creation of new, smaller political units that may preserve selected traditions and institutions from 16 ECONOMIC DEGROWTH AND THE COLLAPSE OF INSTITUTIONAL ORDER: THEORY AND PROPOSITIONS the previous culture. Institutional order, accordingly, is a necessary condition for the preservation of political systems. Several grand theories of collapse emerged in the 20th century (Spengler, 1918; Toynbee, 1939; Sorokin, 1957; Coulborn, 1966) to explain and predict the cultural decline of civilizations. After these pioneering works, scholars turned to social science and archaeological methodologies, a move that resulted in a dramatic increase in the empirical body of evidence on a wide range of collapsed empires (e.g., Eisenstadt, 1969; Cipolla, 1970; Yoffee & Cowgill, 1988). Subsequently, the scope of scholarship extended to include collapses of civilizations and political systems. Alongside the decline of the Roman Empire, the collapse of the Mayan Empire between 600 and 1100 (Thompson, 1954; Culbert, 1973; Webster, 2002), the evolution of ancient Greece (Ober, 2015), and recently, the collapse of civilization in the ninth century Mesopotamia (Allen & Heldring, 2022) are ancient examples of collapse processes at the level of a political system. Finally, some studies have focused specifically on collapses at the level of a single society, such as Easter Island (Van Tilburg, 1994; Brander & Taylor, 1998). A fundamental question in the collapse literature has been whether the breakdown and fall of societal entities can be explained by identifiable causal factors or whether these are explainable only in more complex systemic terms. In some cases, mechanisms of decline can be clearly identified, as in cases of severe environmental degradation (Diamond, 2011; Ponting, 2007) or changes in climatic conditions (Yu et al., 2000; Wang et al., 2005). These mechanisms may trigger or exacerbate more complex dynamics in social instability and disintegration that in turn contribute to collapse-related processes. This has led scholars to study the dynamics of collapse by using mathematical and economic models and to evaluate the importance of proximal and peripheral conditions of decline (Turchin, 2003; Motesharrei et al., 2014), illuminating specifically into those cases of collapse that lack historical data or seem to derive from a variety of sources (Tainter, 1988; Turchin, 2003). However, formal models that focus on the interaction of variables related to economic production and distribution (e.g., tax rate, productivity, level of technology) are limited in their ability to explain cultural or institutional reactions that arise from the actors’ attempts to solve problems related to changing economic pressures (e.g., Ahmadijan & Robinson, 2001). We argue that there are at least two key reasons why a further integration of institutional and economic dimensions can advance the study of collapses of political systems. First, the interplay of social innovations and incentives of different societal groups plays a key role in state formation processes (North, Wallis & Weingast, 2009; Benati & Guerriero, 2020), in processes that establish stable societal conditions in the first place. Although certain economic conditions may represent a necessary condition in the functioning of political systems, they are not sufficient for maintaining and preserving the stability of political systems. Hence, institutional dynamics are important for understanding collapse processes from the perspectives of system (in)stability and (in)efficiency. Second, the insights from transaction cost economics (Williamson, 1985) strongly suggests that institutional 17 ECONOMIC DEGROWTH AND THE COLLAPSE OF INSTITUTIONAL ORDER: THEORY AND PROPOSITIONS orders evolve in connection with actor evaluations of their performance: at the level of individual transactions, a belief in the functionality of an institutional order becomes a psychological and sociological question. In particular, dysfunction in the institutional conditions for transactions can lead to the erosion or rejection of established forms of transactions, which can have substantial effects across the system (Hodgson, 2009). For example, when North (1990) and Greif (2003) characterize private ordering – enforcement and dispute resolution by private actors – as characteristic to underdeveloped institutional orders, the collapse studies indirectly refer to an alternative trajectory in which societies regress to private ordering in which “…action moves from the level of the polity to that of groups… or bilateral traders as they attempt to perfect their trading relations in a self-help way” (Williamson, 2002: 438). In aggregate, these dynamics are relevant for the study of collapse processes, since they extend understanding of how and why economic pressures may trigger threshold responses that threaten the stable and predictable functioning of institutional orders. 3. Why Institutional Orders Collapse We focus on the collapse of institutional order as a process that erodes both the maintenance credibility of public authorities and the predictability of institutions from the perspective of economic actors making decisions on transactions. By the collapse of institutional order, we accordingly refer to system-level transformation processes that result in a radical reduction in the degree of institutional stratification. Our theorizing builds on core ideas in new institutional economics (e.g., Libecap, 1997; Hodgson, 2009; Wallis, 2016) that focus on radical, long-term transformations of institutional orders from less stratified and custom based to highly organized and extensively stratified. Pioneering work by North (1990) and more recent advances in institutional theory (e.g., Allen, 2011; Williamson, 2000; Allen & Heldring, 2022) guide us in seeking rationalized explanations of economic behavior. These behaviors (e.g., decisions concerning transactions) are determined partly by higher order contractual arrangements and formal and informal institutions (North, 1990). However, these same behaviors can also be the engine of institutional change. Accordingly, seeing collapse from the perspective of the decision-making processes at the level of transactions requires us to focus on both the economic context in which the actors are embedded and the functionality of the broader institutional and contractual system (May, Rayter & Ledgerwood, 2016). In the following section, we discuss how institutional maintenance mechanisms may take a reverse role, contributing to an emerging downward cycle (cf. Benati & Guerriero, 2020). Figure 1 synthetizes our theoretical model. Assumption 1: Economic growth and national wealth is a necessary condition for the building and maintenance of institutional systems. 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