An examination of the conceptualization of endogenous change

By Elize Kaulina

Explaining the mechanics of endogenous change has proven to be one of the most difficult tasks of institutional analysts, who have sought to attribute the cause of an observed change of an institutional framework to a choice of the individuals operating within its constraints. This poses a paradox for the investigators, as the purpose of an institutional framework is to provide certainty and stability to repeated interactions between a set groups of individuals. The configuration of the framework originates from repeated exchanges, with the outcomes over time representing the various positions of the institutional equilibria.

The choice of an individual depends on his preferences (interests) and beliefs (knowledge about the environment), which determine the utility he (believes) to have from any possible outcome; consequently, having observed the resolutions of exchanges, institutional theorists have attempted to infer and model the potential expected utility models of the actors involved, in terms of the potential constraints to their exchange, responsible for yielding the observed outcomes. With the actors remaining the same, institutional theorists have been able to attribute the change in institutional equilibria to external factors, which alter the belief systems of said individuals by providing them with new information, changing the “tools” they possess for pursuing their interests; the next exchange between the individuals already takes place in the new institutional framework.

The mechanisms through which exogenous factors can alter the outcomes of exchange in an institutional framework is relatively easily conceptualized, and seldom contested by institutional theorists. On the other hand, endogenous change would require that a repeated exchange between individuals would have different outcomes despite no new information altering the beliefs of the actors involved; consequently, endogenous change would have to originate from a change in the preferences of one of the individuals. Unfortunately, whereas Expected Utility Theory roots the beliefs of an individual in the knowledge he has, which in theory is easily attributable to “information available”, the origins of an individual’s preferences are far more complex, perhaps providing a key insight into the difficulties institutional theory in conceptualizing the sources of endogenous change in practice. 

Path dependence foregone

By Elize Kaulina

An interesting example of path-dependence foregone, is the story of Jacob Kettler, and the time when a part of Latvia nearly experienced a golden-age. Kettler was the Duke of Curlandia and Semgalia in the 17th Century; as he was Baltic German he spent his youth studying in Germany and the Netherlands, where he studied ship construction in Amsterdam and agriculture and geography at Leiden University. Jacob admired the Netherlands and its society, and believed that it was the perfect role model for the Dutchy of Curlandia, as it too was relatively small, cold, and located next to water; furthermore, like the Netherlands, it was had at last acquired some colonies of Tobago and Gambia. Upon return home Jacob tried to steer his Dutchy towards a golden age based on the mercantilist ideas he had seen in the West; he ordered the construction of large ships and steel mills, as the Dutch had, so Curlandia could become a leader in Tobacco and gunpowder commerce, after having negotiated independence from the Polish-Lithuanian Commonwealth and signing the Treaty of Westminister. Unfortunately, despite Kettlers institutional set up, his Dutchy never reached the potential he had envisoned for it; the mills and ships took too long to construct in sufficient quantities for mass production, and his investors began losing faith and patience as he had struk trade deals with Portugal, France and even the Ottoman Empire, but could not deliver enough products. Wanting to expand Curlandia, he attempted a defense reform by introduction of a professional army, but this was resisted by the mannor lords, who feared their lands would be taken. Upon Kettler’s death, his son sowed the seeds of destruction by halting construction in order to finance his own extravigant lifestyle. Unlike Jacob who had studied under the Dutch, having grown up in the most prosperous time’s in Courlandia, and having spent much of his youth in the most lavish courts of Europe (Paris, London, Prussia etc.), Frederick Casimir Kettler was more interested in an extravigant appearance, than in a continued investment in the groundwork of his father. After several defficits he was forced to sell the island of Tobago to the English , which Jacob had valued so high as a means of securing Curlandia’s future, that he had re-conquered it after losing it to the Dutch. With no more Tobago, there was no more Curlandian tobacco, and the negative feedback mechanisms of a shrinking economy set in. Despite the efforts of Jacob, he was not able to set Curlandia on a trajectory from which mercantile institutions could become path dependent through self inforcing mechanisms, despite his clear vision.