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An Evolutionary Theory of Economic Change

An Evolutionary Theory of Economic Change - RICHARD R...

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Unformatted text preview: RICHARD R. NELSON AND SIDNEY G. WINTER AN EV©LUTH©NARY THE®RY (DE EC©N©MHC @[email protected] THE BELKNAP PRESS OF HARVARD UNIVERSITY PRESS CAMBRIDGE, MASSACHUSETTS, AND LONDON, ENGLAND 1982 much the possible improvements might mean to my enjoyment of life or to my life expectancy? The world seen by evolutionary theory differs from an orthodox world not only in that things always are changing in ways that could not have been fully predicted, and that adjustments always are having to be made to accommodate to or exploit those changes. It differs, as well, in that those adjustments and accommodations, whether private or public, in general do not lead to tightly predict- able outcomes. For better or for worse, economic life is an-adventure. [email protected] The Evolution of Public Policies and the Role of Analysis PUBLIC LAWS, policies, and organizations are an important part of the environment that shapes the evolution of private sector activi- ties. Laws and policies regarding what is patentable and what is not, and about acceptable or required licensing agreements, influence the relative advantages of innovating and imitating. Antitrust law and its administrative and judicial interpretation define acceptable com- petitive behavior. Regulatory regimes constrain and mandate certain private actions. Public school systems and educational support pro- grams influence the flow of trained personnel into research and development activity. Government R&D support programs have, since World War 11, provided approximately half of the total funding for research and development. More generally, a significant portion of economic activity is conducted by public rather than private orga- nizations. The evolution of economic capabilities and behavior must be understood as occurring in a mixed economy. Although for some purposes it is useful to think of public laws, policies, and organizations as being part of the landscape, these, like private sector activities, undergo continuing evolution. Over the long run the cumulative result of private and public actions and reac- tions is a gradual modification of the basic structure of society. Karl Marx, of course, was concerned above all with the patterns, and po- tential discontinuities, of such long-run changes. Much of Schum— peter’s Capitalism, Socialism, and Democracy was an elaborate prog- nostication that the natural dynamics of capitalistic competition would lead to the political enactment of some form of socialism. 372 ECONOMIC WELFARE AND POLICY Our focus in this chapter is less broad, and shorter-range. We con- sider the evolution of particular public policies, or policies address- ing particular phenomena. We shall, first, develop a general View of the processes by which public policies come into being, are modi- fied, and (sometimes) fade away. Then we will turn to a particular as- pect of those processes—conscious attempts to marshal knowledge to guide policy. As with our evolutionary theory of capabilities and behavior of business firms, in our analysis of the determinants Of government policies we recognize that people and institutions often try to be rational about decision making, but also that human under- standing is incapable Of what Lindblom has called effective “syn- optic” analysis, and hence that even very thoughtful behavior has major elements of “muddling through” (Lindblom, 1972). We also recognize, with Keynes, that human attempts to analyze problems are powerfully influenced by the theoretical perspective from which the problems are viewed. Indeed, we have stressed at several places in the book that the ability of a theory to illuminate policy issues ought to be a principal criterion by which to judge its merit. We conclude this chapter, therefore, by considering how our evolutionary theory of technical change—a topic we have considered at some length—illuminates the question of the fruitful, and unfruitful, roles for government to play in industrial innovation. 1. MECHANISMS AND ACTORS Public policies evolve partly in response to changes in perceived de- mands and opportunities, changes that may result from the evolu- tion of private technologies and market structures or from other identifiable shifts in objective conditions. Public policies may reflect not changes in objective conditions but shifts in values, or under— standing. Change over time in the relative power of different inter- ests and groups within society likely will pull changes in policy in their wake. The particular institutions and procedures for arriving at and modifying policies determine the way in which the various forces mentioned above are translated into new policy departures. Sometimes the institutional machinery for making policy seems to take on a life of its own. The evolution of air quality regulation in the United States dis- plays the workings of all these forces and mechanisms. Air quality in the United States generally declined during the 19505 and 19605. Although in some communities, like Pittsburgh, air quality was im— proved as a result of local initiatives to roll back the emission of pol— lutants (in this case, prohibitions on the burning of soft coal), in 13%“ my. 4., (.1 t. r « L as. 4, mm. a??ka THE EVOLUTION OF PUBLIC POLICIES 373 communities like Los Angeles a combination of significantly in- creased automobile traffic and petroleum refining led to noticeable deterioration. The sources of the deterioration were not obvious a priori. Assessment of the effects of various pollutants on health has been, and still is, constrained by the state of biological knowledge and by limits on measurement techniques. Thus, until recently con- cern about the emissions from coal-burning electrical generating plants was focused largely on sulfur dioxide, whereas recent studies suggest that sulfates may be a more serious problem. Published studies played a central role in the consciousness- raising regarding air quality. Some of the studies were narrowly fo- cused; for example, during the 19505 scientists at the California Insti— tute of Technology implicated auto exhaust as a source of the smog besetting Los Angeles. Some were quite sweeping. Rachael Carson’s Silent Spring (1962) sounded the alarm regarding industrial pollutants in general. During the 19605 the trickle of studies became a flood. The Club of Rome forecasted impending disaster (see Meadows et al., 1972). More focused and cautious studies—for example, that by Ridker (1967)—provided some of the first estimates of the economic costs of air pollution. The policy response developed hesitantly. Several states enacted laws to protect air quality; California’s auto emission control stan- dards of the early 19605 is a prominent example. Federal action was piecemeal. In 1965 Congress authorized the setting of auto emission control standards. Generally, however, at the start the federal legisla- tion shied away from imposing particular standards, and a consider- able amount of responsibility and freedom of initiative was vested with the states. The 1970 amendments to the Clean Air Act located significantly more power in a federal bureau—the Environmental Protection Agency (EPA)—and wrote into the legislation more detail about how regulation was to proceed. The 1970 amendments took the form they did in part because of the political aspirations and strate— gies of some of the key legislators involved. Iacoby and Steinbruner (1973) note that Edmund Muskie was chairman of the key Senate committee and, at the time of the hearings, was considering a run for the presidency. He and other legislators believed (and they seemed to think that a good share of the American electorate agreed) that the states had not been acting forcefully enough—that the private com- panies who were creating the pollution, or designing the automo— biles that polluted, were culpable and ought to be brought to account. There also was a belief that if particular technological re- quirements were imposed, the companies would have the incentive and the ability to achieve these and the costs involved would not be unduly burdensome. The particular form of the new legislation, the way the legislation 374 ECONOMIC WELFARE AND POLICY was interpreted by EPA, and the subsequent experience of adminis- trative and legislative amendment, was somewhat different in the several areas of application. However, the stories told by Iacoby and Steinbruner (1973), Sonda (1977), and White (1981) about automo- bile emissions control, by Lurie (1981) about emissions from copper refineries, and by Ackerman and Hassler (1981) about the regulation of coal-burning electrical generating plants have many elements in common. While the 1970 legislation fenced in the range of action open to the EPA, in the nature of things Congress could not specify all the details, and the constraints were roomy enough so that the EPA still retained considerable discretion. Partly because Congress had so mandated and partly because of the way in which the EPA in- terpreted the legislative mandate, EPA regulations took the form of particular required standards, often tied to assessments of what would be safe for humans, sometimes keyed to judgments about what the best technologies would be capable of achieving. Environ- mental protection groups and the industries being regulated both tried to pressure or persuade Congress and the EPA to modify the regulations. A portion of this pressure was exerted through litigation and the courts. To set and justify the standards and to protect those in litigation, the EPA undertook many studies, attempting to assess the scientific evidence about health effects and the evolving state of the tech- nological arts. These studies generally did not concern themselves with the broader questions of the benefits and costs involved in various strategies of environmental protection, or even with ex— ploring the range of possible instruments; rather, they were focused on a particular regulation to be formulated or one that was under at- tack, and attempted to justify a particular proposed or extant stand- ard or to examine certain specific changes in that standard. Recogni— tion of a wider range of values at stake in environmental protection legislation was forced upon Congress and the EPA by the pressure and litigation of various interest groups. The automobile companies claimed impossibly high costs and lost jobs as a consequence of pre- vailing regulation, as did the Eastern coal companies and the coal unions. EPA studies in general did not anticipate these complaints and did not attempt to come to grips seriously with the tradeoffs they implied. Similarly, EPA studies seldom explored seriously different regulatory instruments, such as the use of effluent fees instead of the setting of requirements. In contrast, at universities and at such research centers as the Brookings Institution these broader questions of values, tradeoffs, and strategies were being explored. Studies such as the one by Kneese and Schultze (1975) were intended for a nonacademic audi- ence, and by the mid 19705 the political climate had changed notice- THE EVOLUTION OF PUBLIC POLICIES 375 ably. Some of the change surely reflected a new understanding of the tradeoffs involved and of the range of possible regulatory instru— ments. By the late 19705, under the Carter administration, regulatory re- form became a byword. Under Charles Schultze’s leadership, various checks on the EPA (and other regulatory agencies) were established within the administrationwchecks that surely forced the EPA to pay more attention to tradeoffs and alternative instruments, which in turn strengthened the hand within the EPA of civil servants who be- lieved in regulatory reform. Despite some move in the direction of balancing benefits and costs, by 1980 the public mood had swung even farther. The presidential candidates of both major parties ran partly on deregulation planks. This has been a terse account of the history, from 1967 to 1980, of clean air regulation, but enough has been said to suggest the broad outlines. While in some ways very particular to the case, in many ways the pattern is typical. For example, the study by Crain and colleagues (1969) of the spread and then the halt of fluoridation of public water supplies re- veals many similarities with the air pollution case. Initiation of a public program was triggered by perception of a need that could be met by public—sector activity—the desirability and the possibility of reducing tooth decay in children through fluoridation of public water supplies. The workings of public institutions and mechanisms strongly influenced how fluoridation proceeded and how that policy was effectively stopped. In the early stages local administrative agencies—~health departments and water supply departments— treated the fluoridation question as within their province and as out- side the arena of democratic politics. Eventually, voices were raised questioning the safety of fluoridation and even the legitimacy of gov- ernmental decisions to add substances like fluoride to public drinking water regardless of the possible benefits to children. It was proposed that children could drink fluoridated milk. The question of whether or not to add fluoride to the public water supplies became one on which political candidates often had to take sides. In some cases specific referendums were held on the subject. Again, while there are important elements specific to the case, the history of public policies regarding fluoridation has a pattern that fits the evolution of many other policies. There are many threads in common with the story told by Steiner (1971) about the evolution of welfare policy in the United States, and with Heclo’s account (1974) of the evolution of welfare policies in Britain and Sweden. Similar elements are apparent in the analyses by Art (1964) of the TFX deci- sion and by Nelson (1977) of policy toward the supersonic transport. All of these studies suggest certain similarities in the evolution of 376 ECONOMIC WELFARE AND POLICY public- and private-sector activities. At any time, public policies, like private technologies and policies, are implemented by organiza- tions largely as a matter of “organizational routine." Changes from existing routine usually are local, although there may be an occa- sional major change. Those changes may survive and take hold, or they may be turned back. Because a good share of the changes pro— posed are local and because the selection environment is compara- tively constant, public policies tend to follow certain trajectories. Thus, a policy change today might fruitfully be understood as evolving from a policy base that was itself the outcome of a sequence of earlier changes, and, in turn, as setting the stage for future evolu- tionary developments. The case studies also point to important differences between pri- vate and public policy making. The key ones are, first, the multiparty nature of public decision making and, second, the complex machin- ery that it involves. In orthodox economic theory (if not necessarily in actuality) the goals of a private business firm are treated as those of a single person. Although much political discussion proceeds in terms of a search for the “public interest,” political scientists as well as economists understand that such a “public” is more a figure of speech than a concrete entity with identifiable goals. The actual “public” that is interested in policy choices and outcomes has a di- verse, divergent makeup and interests that are at least in partial con- flict. Further, there are several different ways by which interested parties can influence policy making. The case studies discussed above indicate that in many instances several different types of actors and a variety of mechanisms are involved.1 In a democratic society, citizens and citizen interest groups ulti- mately are sovereign. Occasionally, as was the case with fluorida- tion, sovereign power may be expressed in a specific referendum on the issue. In other cases there may be no specific referendum, but candidates for electoral office may take particular stands on the issue and the outcome of the election may be interpreted as that of a refer- endum. More commonly, a particular policy is not advertised as part of electoral politics, but elected officials and interest groups have worked out their own understood accommodation. 1. Although the multiplicity of kinds of actors is apparent in most case studies, many theoretical treatments of political decision making focus on one, or maybe two, different actors. Thus, for example, Downs (1957) deals with the electorate and politi- cians running for office, and Niskanen (1971) with departmental bureaucrats and executive-level budget officers. In both the clean air and fluoridation cases, at one time or another the electorate, officials running for office, civil servants, and the courts all played important roles. .waaa tame... ,m . smegmamaw .«L t; THE EVOLUTION or PUBLIC POLICIES 377 As suggested, specific referenda are rare. Because of this, elected officials—both executives and members of legislatures—generally have considerable freedom of action. The air pollution and fluorida- tion cases both demonstrate the importance of the values and percep- tions of elected officials. Just as voter sentiment generally provides only loose constraints on the actions of elected officials, so the decisions of elected officials generally leave a considerable amount of discretion for the civil ser- vants and others who carry out a program or policy. Prior to the 19605 the role of “administration” was seen in the political science litera- ture as simply technical, consisting of working out the best way to achieve an objective or to carry out a policy defined by elected offi- cials and mandated by the electorate. Since that time, it has become better recognized that the shape of a policy is to a considerable extent determined by how it is implemented. . In addition‘to voters, elected officials, and bureaucrats, the courts often play a significant role in determining policy. Many activities are controlled by regulatory authorities. In a federal system there may be several layers of involved governments. Policy making and reVISing is a complex multiactor game. The relative importance of the different actors and the way in which they play their roles certainly differ among the various arenas of public-sector activity. Dahl (1961) stressed this diversity in his dis- cussion of pluralistic democracy. The politics and administration of defense clearly differ from those of education, which in turn differ from those of welfare. And, as the cases of air quality regulation and fluoridation both show, the roles of the different political actors can change over time. These differences and changes are in part determined by and re- flected in the particular design of the political machinery. The machinery determines and defines how the various parties interact and how, out of that interaction, policies emerge and change. Stu- dents of voting theory long have known that, for given preferences and alternatives, the particular voting rules and the way in which the alternatives are presented strongly influence the outcomes. Wil- davsky’s (1964) study of the federal budgeting process alerted schol- ars to the key role played by the administrative machinery of budget— ing. It also seems inadequate to view the political and administrative machinery merely as a way that the weights of different interests are determined. The machinery plays a powerful role in its own right. Thus, in the case of air quality regulation it was important that the Senate hearings not only were part of the machinery for determining what to do in that instance but also were a stage for politicians inter- ested in reelection or in other future posts. 378 ECONOMIC WELFARE AND POLICY Throughout this book, and especially in Cha...
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