CUMULATIVE CAUSATION, CORRIDOR OF DIVERGENCE AND INSTITUTIONAL MATRICES Svetlana Kirdina Institute of Economics, Russian Academy of Sciences, Moscow AFIT at WSSA April 10-12, 2013, Denver, Colorado

The main idea of the paper AFIT, Denver, Colorado, April 10,  Is to develop Veblenian ideas of cumulative causation as well as Marxian historical materialism to explain the permanent dichotomy of social and economic systems in the world.  An institutional matrices theory (Kirdina, 2001, 2003 …) develops both these ideas and shows two attractors for social and economic trajectories within the corridor of divergence.

Cumulative causation AFIT, Denver, Colorado, April 10,  Cumulative causation (CC) principles have been investigated in different spheres of economic analysis. They demonstrate a “positive feedback” approach to the social and economic change and emphasize the circular and cumulative character in the process.  Nanako Fujita (2004) shows three origins and currents of CC theory: 1) Veblenian CC theory (1898); 2) Wicksellian CC theory (1898); 3) Young-Kaldor type CC theory (1928).

Veblenian CC theory AFIT, Denver, Colorado, April 10,  Thorstein Veblen focused on the “institutional change” and stressed the necessity of “theories of a comprehensive process by the notion of a cumulative causation” (Veblen 1898, p ). Veblen applied the Darwinian principles of variation, inheritance and selection to institutional evolution. The process of historical evolution of institutions, according to Veblen, is ‘the natural selection of institutions’, “a scheme of blindly cumulative causation, in which there no trend, no final term, no consummation” (Veblen, 1907, p. 304), which “transforms the entire society in a myriad of different ways” (McCormick, 2006, p. xxi).

Not only divergence AFIT, Denver, Colorado, April 10,  We can see, indeed, that there is not always only a divergent process in the real world. Actual path dependency concept develops alternative ideas. It is a broad concept that "history matters". In means that “where we go next depends not only on where we are now, but also upon where we have been" (Liebowitz, Margolis, 2000, p. 981). We are able to correct a historically chosen path and institutions but we are unable to dramatically change them. As Bellaïche meant, "the phenomenon of dependence of history might be ignored for short period of time (10 years, 20 years), but is not negligible for secular comparisons" (Bellaïche, 2010, p. 178).

On stable institutional structures AFIT, Denver, Colorado, April 10,  Of course the modern society of Great Britain or China is not just a larger replica of the society of several hundred years ago. It is dramatically different in most every aspect of social life. But we can suggest that some institutional structures retain their contents. As Schumpeter wrote about market institution, e.g.: “as far as it goes about market economy, for fundamental theory it makes no difference what kind of market economy it is: a system of primitive exchange between hunters and fishermen or a complex organism that we can see today" (Schumpeter, 1926, s. 74). An institutional matrices theory (Kirdina, 2001; 2012; 2012a) deals with such kind of permanent macro-structures.

Main preconditions of Institutional Matrices Theory (or X- and Y- Theory) AFIT, Denver, Colorado, April 10,  Each sphere (economy, politics and ideology) is regulated or guided by a particular set of basic institutions made-in-a-society’s image (i.e. reflexively).  Economic, political and ideological institutions represent the “institutional matrix” of human societies and as such can be studied by political economists, economic sociologists and other scholars.  Two main types of institutional matrices can be identified: the X-matrix and the Y-matrix.

X- and Y-matrices * Redistributive economy with the Center * Market (exchange) mediating economic transactions economy * Centralized political order * Federative political order (top-down model) (bottom-up model) * Communitarian ideology * Individualistic ideology (We over Me) (I over We) AFIT, Denver, Colora do, April 10, X Y Redistributive economy Communitarian ideology Unitary-centralized political order Federative political order Individualistic ideology Market economy

Institutions of X- and Y-matrices in the economy and their functions AFIT, Denver, Colorado, April 10, Functions of institutionsX-institutionsY-institutions 1. Regulating access to goods (property rights system) Supreme conditional ownership Private ownership 2. Transfer of goodsRedistribution (accumulation- coordination- distribution) Exchange (buying-selling) 3. Interactions between economic agents CooperationCompetition 4. Labor systemEmployed (unlimited term) labor Hired (short and medium term) labor 5. Feed-back loops (effectiveness indexes) Cost limitation (Х-efficiency) Profit maximization (Y-efficiency)

Institutions of X- and Y-matrices in politics and their functions AFIT, Denver, Colorado, April 10, Functions of institutionsX-institutionsY-institutions 1.Territorial administrative organization of the state Administrative system (unitarity) Federative structure (federation) 2. Governance system (decision making) Vertical hierarchical authority with Centre on the top Self-government and subsidiarity 3.Type of interaction in the order of decision making General assembly and the rule of unanimity Multi-party system and the rule of democratic majority 4. Access to governing positions AppointmentElection 5. Feed-back loopsAppeals to higher levels of hierarchical authority Legal suits

Institutions of X- and Y-matrices in ideology and their functions AFIT, Denver, Colorado, April 10, Functions of institutionsX-institutions of communitarian ideology Y-institutions of individualistic ideology 1. Core principle of social action CollectivismIndividualism 2. Normative understanding of social structure EgalitarianismStratification 3. Prevailing social valuesOrderFreedom 4. Labor attitudesWell-being-orientedPecuniary-oriented 5. Principles of common thinking Generalization- Integralism/Holism Specialization- Atomization/Mereism

Combinations of governing and complementary institutional matrices Russia, China, India, Europe and Western most Asian, Middle Eastern, Offshoots: the USA, Latin American as well as Canada, Australia, some other countries and New Zealand AFIT, Denver, Colorado, April 10, Y X Y X

Why do X- or Y-matrix institutions prevail? AFIT, Denver, Colorado, April 10,  The material and technological environment of a society is a key determinant for the prevalence of either X- or Y- matrices.  The environment can be a communal, indivisible system, under which the removal of some elements can lead to the disintegration of the entire system, OR  The environment can be non-communal, that is, with opportunities for technological division and possibilities for separate individual usage.  In a communal environment the X-matrix institutions are dominant and the Y-matrix institutions are complementary. In a non-communal environment it is the opposite.

Preservation of the leading position of one or the other matrix in the history of nation-states AFIT, Denver, Colorado, April 10,  Historical research shows that the prevalence of one or the other matrices has a steady character. Even if, by virtue of external pressures or under influence of distorted internal reasons, attempts are made to replace one dominant matrix (X- or Y-) with the other subordinant matrix (Y- or X-), such a situation of outright reversal is, as a rule, short-lived (in historical time). For example, attempts at systematic institutional change in Eastern Europe under influence of the USSR or the countries of Latin America under pressure of the USA.

Proportion of GDP produced by countries with a prevailing X- and Y-matrix, (Maddison Data Base, sample of 34 nations~75% of World GDP) X-matrix countries: China, India, Japan, Brazil and former USSR countries. Y-matrix countries: Western Europe including Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Sweden, Switzerland and United Kingdom, and Western Offshoots including the United States, Canada, Australia, New Zealand. AFIT, Denver, Colorado, April 10,

Corridor of divergence AFIT, Denver, Colorado, April 10, Waves of divergence reflect cyclical interdependence between X- and Y-matrix countries. Looking at the above mentioned figure we could assume the existence of ‘a corridor of divergence.’ There are two attractors, namely X- and Y-prevailing matrices’ countries. Such a corridor is designed in a future oriented way and represents an open space for global development between two axes representing the attractors. There are boundaries of ‘a corridor of divergence’: on average, the share of one type countries (with X- or Y-prevailing matrix) couldn’t be less than one third and more two thirds.  Here we understand divergence not in a sense of the increasing distance between the richest people/nations in the world and the very poorest people/nations or between top and bottom incomes. We consider an institutional divergence or varieties of institutions performed people to organize a social and economic life. 

Conclusion AFIT, Denver, Colorado, April 10,  It is the theoretical challenge to identify conditions and mechanisms pushing institutional change toward homogenization or divergence. An approach based on the institutional matrices theory (IMT), or X- and Y- theory, in this context helps us to investigate the contours of contemporary global trends and provides a methodology for institutional studies considering the world economy into an interdependent whole.

AFIT, Denver, Colorado, April 10, Thank you for your attention!