Hellerian Capitalism II: Douglass North and Institutional Impersonality

Nicholas Roerich 'Nanda Devi' 1944

By way of introduction let me say I first read Nobel prize winner Douglass North in the early 1990s when I borrowed Institutions, Institutional Change, and Economic Performance (1990) from my father who was also a social scientist. Like so many others I was immediately influenced by this extremely persuasive new economic approach to the study of institutions. 

Over the years I realised that some of North’s central ideas had roots in classical economic sociology. North packaged them differently by combining them with advances in economics such as rent-seeking, game theory, path-dependence, Coaseian transaction costs. But the substance relating, for example, to appropriation of property rights and transitions from customs or convention to law could rightly be called Weberian. Sometimes North’s conceptual language and meaning is identical to Weber’s, though Weber is not mentioned.

While I wrote my book on capitalism I spotted some flaws in the writings of Douglass North and new institutional economics. The most important ‘missing piece’ in North’s conceptual jigsaw was the impersonality of modern public organisations, i.e. impersonal institutions. 

North did not discover the vital importance of institutional impersonality until very late in his academic career. He and I both published books within a month or two of each other in 2009 in which development of institutional impersonality is key to the argument.  

Previously, with one or two equivocal exceptions, every mention of impersonality in Douglass North’s writing referred only to impersonal exchange in economic transactions, and never to impersonality or impersonal exchange in institutional or governance domains. That lacuna was not addressed in North’s 2005 book Understanding the Process of Economic Change, which was edited by Peter Dougherty at Princeton (last week’s post).

Max Weber had similarly emphasised the growing impersonality of economic relationships as fundamental in development. For example Weber wrote in Economy and Society that “rational economic association always brings about depersonalisation”. 

Unlike Weber, however, Douglass North had not taken the ‘impersonality’ insight one step further by recognising a similar process at the heart of modern governance. There was no recognition at all in North’s work of impersonal social relationships, impersonal political exchange, impersonal state organisations, impersonal citizen rights, impersonal equality before the law, impersonal public services, impersonal public goods, impersonal policies. 

It is not until 2009 with the publication of Violence and Social Orders that Douglass North recognised impersonality as the fundamental feature of governance in modern society. One can gauge how highly North rated this discovery in the concluding 20 pages of Violence and Social Orders where the words “impersonal”, “personal”, and “impersonality” appear 75 times. This was a radical departure for North. 

Under dramatic headings such as A New Research Agenda, A New Approach to the Social Sciences, and Toward a Theory of the State, we find out that impersonality of institutions has become North’s pivotal concept.

Prior to 2009 the blind spot in North’s analysis of institutional change — as I pointed out in my book proposals to the top academic presses from 2006 onwards — was the interactive and procedural impersonality of modern state organisations, with all that implies in terms of ‘formal equality before the law’ and the predictability and ‘continuity’ of institutions. What Douglass North now refers to as “perpetual” is what Weber and I had called “continuous”. 

Violence and Social Orders is in various ways a great book, a tremendously valuable contribution to the literature, and one that I might happily reference in reputable support of my arguments. Some of the historical analysis is superb. Also, of course, I do recognise that Violence and Social Orders is not just about impersonality per se. I will later comment critically on particular concepts or models in the book such as the natural state and open access order transition. And I have things to say about the central focus on the problem of violence, which I believe is rather a red herring. 

Clearly I am laying claim to the originality of my 2003 argument about impersonality in governance. If the concept is as important as the concluding chapter of Violence and Social Orders emphasises it is, then I was the first person to supply the missing piece of the puzzle in the social scientific study of institutional change. To be blunt, although North and I published it simultaneously in 2009, I had the idea first. 

At a general level the impersonality or depersonalisation of the state had often been included in writings on philosophy, political science, history, and so on. Harvey Mansfield may be the most notable example. But Mansfield only flags the impersonality concept in a brief and context-specific 14-page chapter on Machiavelli. As I am sure even Mansfield would admit, it was hardly a comprehensive or deep analysis of state impersonality. 

With the exception of Max Weber (possibly also Gianfranco Poggi and one or two other partial exceptions) I am not aware of any scholar who made impersonality the centrepiece of a developmental model in the way I attempted to do publicly since 2003 in individual submissions to top flight UK and USA academic publishers. 

All my submissions pointed out the weaknesses in Douglass North's work on institutions. 

As I discuss in my book (pp 37-8), Weber's theory of institutional impersonality was ignored even in the most prestigious writings on Weber. 

Richard Swedberg's influential Max Weber and the Idea of Economic Sociology mentions 'impersonality' only twice, and dismissively. 

The most recently published major English language book on Weber — Max Weber’s Theory of the Modern State by Andreas Anter, which is a 2014 translation of Anter’s German original published 1995 — is similarly dismissive and critical of the impersonality concept, and utterly misleading in its interpretation. Anter writes - “Neither here nor in any other part of Weber’s writings can we find a positive assessment of impersonal rule”. That sentence alone makes Anter’s book look ridiculous to any careful reader of the existing English language translation of Weber’s principal text Economy and Society. 

I note that North's Violence and Social Orders references Quentin Skinner as its primary source for the positive explanation of political or institutional impersonality. Yet in that magnificent and long treatise on the history of political thought Skinner only uses the term “impersonal” 4 times in passing, only descriptively, and only in the final 3 pages!

In contrast, a fully integrated theorisation of impersonal social relationships, impersonal political exchange, impersonal state organisation, impersonal citizen rights, impersonal equality before the law, impersonal public services, impersonal public goods, impersonal policies, etc. was the centrepiece proposition in my submissions to publishers in 2003 and 2006-7. This was and remains an unacknowledged theoretical breakthrough.

A difference between Douglass North and me is that I acknowledged my debt to Max Weber. Possibly my idea accidentally leaked out. Or maybe it was one of those remarkable once-in-a-generation ideas which for complex reasons pops into two or three unconnected people’s minds simultaneously. Or perhaps something nastier occurred. Weber’s concepts of group closure, exclusion, monopolisation, patrimonialism, personalism, negative privilege, and wrongful appropriation would provide the right methodological apparatus for describing that nastiness. 

There is a section of the elite social science fraternity which reversed its previous positions and suddenly became enamoured with the idea/ideal of institutional impersonality. 

Postscript 1:

In the flurry of activity in 2003 which followed a threat from my employers at UTS to deny me routine sabbatical leave to complete my book if I did not show them documented evidence of my efforts to publish, I prematurely rushed out the proposal to Princeton, to Yale, and also an article to the American Journal of Sociology (AJS) titled ‘Economic Sociology, Capitalism, and Impersonality’. I may blog sections of that paper in the future, but suffice it to say now that the central argument offered to AJS was essentially the same as the one I sent to Princeton University Press in 2003. 

I can today put on record the comments of one of the AJS reviewers, which I received in 2004. It has been suggested to me that this was (99%) likely to have been Richard Swedberg, the well known authority on Weber’s economic sociology, though the reviewer’s identity can’t be known with (100%) certainty. Whoever wrote this AJS review was certainly  intimately familiar with Swedberg's book Max Weber and the Idea of Economic Sociology (Princeton 2000).

This American Journal of Sociology reviewer said of my article in 2004:

“The key argument of the author of this particular paper -- that modern capitalism operates primarily through interactions between people who are not connected through personal networks, already know each other, and so on -- cannot be found in [the] literature, as far as I know… the author should be credited with being the first to put it on paper.”

Even though (strangely) no one had ever previously written down this huge idea that impersonality is the defining condition of modern capitalism’s institutions, the reviewer illogically infers that I must have picked up the idea at an economic sociology conference. But I have never in my life been to one of those conferences. My paper was refused, of course. It would have upset a row of apple carts. 

Postscript 2:

At the time I had only two revolutionary ideas: 1. Weberian institutional impersonality (sent to the American Journal of Sociology) and 2. Schumpeterian discontinuous institutional change (sent to the American Sociological Review). By releasing them to journals and also to book publishers I ran the risk of the ideas ‘leaking’. Little could I have known that in my choice of book publishers I was inadvertently delivering my 'Institutional Impersonality' innovation directly into the hands of named individuals who would most benefit from appropriating it as their own — the very persons whose theoretical weaknesses I had revealed in the book proposal, and whose conceptual problems I solved in the chapter. 

I sent my ‘big new paradigm’ chapter on impersonal capitalism to Peter Dougherty — Douglass North's editor and publisher at Princeton University Press — in 2003. Peter Dougherty complemented me on my writing and analysis, and asked me to send him more chapters. I did so when they were ready for publication in 2006. It took me two more years to persuade a publisher to take it on. I tried them all one by one... politely... as one is meant to do. In the meantime Douglass North had recruited John Wallis and Barry Weingast to help him cook up a complexly layered new theory of the sequenced development of institutional impersonality. The result was Violence and Social Orders, released two months before my Capitalism, Institutions, and Economic Development. 

In their concluding chapter North, Wallis, and Weingast (NWW) grandly called the theoretical substance of their bestseller book “a new approach to the social sciences”. Not modest. And, in essence, not “new”. The theory of institutional impersonality was my idea. When I shared it with the world’s most prestigious publishers of social science writing in 2003-2007 I assumed I had (gentlemanly, informal) property rights to that idea. Those rights were violated. 

Postscript 3:

In December 2003, precisely two months after I had sent Douglass North’s editor at Princeton University Press Peter Dougherty my book proposal and chapter about institutional impersonality, Douglass North, who — unbeknown to me —  was at that very moment working with Peter Dougherty preparing the manuscript for North’s next book, gave a lecture to an audience in Brazil in which he explained the informal-formal characteristics and enforcement mechanisms of institutions using the analogy of how to win by playing dirty in American football. 

In the spirit of this especially enthusiastic bravado segment of Douglass North’s high-pitched lecture simply substitute American social science for American football:

“Now, let me tell you that in the United States if you play dirty you’re going to do very well probably. As long as they don’t catch you. Now, that means that the way the game is actually played is very different than the formal structure that we set up. To the degree that you can get away with injuring the key players on the opponent’s team the odds are you’re going to win the game. Moreover it’s very hard to be able to get effective enforcement. The referees don’t see everything, and indeed the referees may even be biased or indeed be bribed. The norms of behaviour may not be strong enough to get people to live up to standards of honesty and integrity that you want … You must, therefore, understand how the formal rules and informal norms and enforcement characteristics work in particular markets, what makes them work the way they do and what makes them work differently from their intention. And that’s the beginning of intelligence. That’s the beginning of being able to understand what’s happening to you.”

So I understand what happened.

But now to the serious matter in hand, the 2nd section of the earliest version of my detection of the impersonality pattern in Weber’s detection of the impersonality pattern in world-shaping modern institutional history … which I achieved in splendid scholarly isolation and posted to Peter Dougherty, chief editor at Princeton University Press on 12 October 2003.

________________

Chapter 4: Capitalism by Michael Heller (2003)

Section 2: Combined Conditions of Capitalism

“One chooses the crucial and elementary factors operative in human history, selected to the best of one’s judgement, and then works out their joint implications” (Ernest Gellner 1988)

Weber’s notable achievement is to explain the nature of dynamic interactivity between conditions of capitalist transition. The conditions fall within four reciprocal development categories - rational market ethics, legal regulation, state administration, and political representation. Together these domains of social action generate -- in near-to-ideal type capitalism -- evolutionary pressures for efficient institutional adaptation. This interactivity is the central institutional dynamic in modern society, and the vector that transmits capitalistic patterns of action. The empirical conditions are a product of the dominant binding normative orientation in society which is common to these institutional spheres.

By normative orientation of action I mean the degree of abstract impersonality embedded in procedural norms of social sub-systems and organisations. 

Impersonality has two principal institutional effects, or rather produces two abstract regularities which similarly feature in modern markets, legal systems, bureaucracies and systems of political representation. 

On one hand, the development of systems characterised by abstract impersonality -- that is, systems in which behaviour is oriented mainly to rules rather than to people -- increases the predictability or calculability of outcomes. 

On the other hand normative impersonality, which is embedded in regulatory frameworks that diminish the amount of personal discretion in decision making, counteracts the universal process of monopolisation by increasing the rights and opportunities to make usurpatory claims against power holders. 

Competition, compromise and voluntary association are, in one form or another, central elements of a depersonalised social order. In fact, Karl Popper wrote once that the transition from the closed to the open society of advanced capitalism is the birth of an abstract impersonal order in which social and economic status is decided competitively. He described the open society as a “depersonalised society”. The transition from the closed collectivist society held together by “concrete physical relationships” not subject to “competition for status” to the open society is “one of the deepest revolutions through which mankind has passed” (Popper 1945/1966).

I will now summarise the main factors of institutional transition as a prelude to justifying the methodological principles of an interactional analytic focus. It is important to bear in mind while considering these summarised elements that all four institutional domains are simultaneously non-economic and economic. In other words each institutional sphere is concerned with parallel areas of competence and authority, which may take the form of policy roles and positions, and which impact on the lives of individuals and groups at various levels, and not only economically. 

Ethical transition: In the ethical domain the order of impersonality arises from market competition. As Weber wrote, the “market community is the most impersonal relationship of practical life into which humans can enter with one another” (Weber 1922/1978). In the developed market situation actors monitor, cooperate and compromise with each other, but orient themselves ultimately only toward the commodity without obligation of brotherliness or charity. They do however develop beliefs about behavioural standards that are not only moral but functional too. In Weber’s words, “the growing impersonality of the economy on the basis of association in the market place follows its own rules, disobedience to which entails economic failure and, in the long run, economic ruin” (ibid.). 

The procedural ethics evolve as the market gradually encroaches and envelops human interactions, and they are increasingly rationalised as social values and legal norms. From this perspective market evolution, with its ethical basis, is the catalyst for the structural transformations that give birth to capitalism. As capitalism develops so regulated competition is subject to a legitimate order of impersonal procedural norms. 

Long before an advanced legal framework regulates market competition, societies moving towards capitalism experience a twofold secular ethical transition that takes form as a tolerance of honest competition and an intolerance of communitarian closure. 

In the first place we find the tempering of fraternal bonds in closed societies under the impact of an economic impulse which favours commerce and voluntary association. Secular ethics of fair dealing (which often have their origins in communitarian or religious beliefs) continue to sustain the internal economy in so far as requirements of social cohesion put a premium on honesty. Increasingly the communal basis of economies breaks down as similar principles are applied in the external economy in order that trade may expand beyond the borders of communities. 

The second ethical transition occurs during the transition to industrialism when the market exerts pressure on labour and capital owners to be methodical and calculative. Forms of competition are legitimised which permit innovators to usurp monopolies and break through existing technological and organisational barriers to commerce. Ethics of honesty fuse with a social legitimation of usurpatory economic action and are upheld “by the probability of disapproval of violations” and “the consequent boycott” (Weber 1922/1978). 

One of the important requirements of capitalism is continuous relationships and continuous institutions. The existence of a positive economic ethic, no matter how strong, will not be sufficiently continuous unless formally institutionalised. 

Legal transition: Economic transactions of the advanced trading system therefore depend on a perception that transfers of property and contractual claims are legally secure without “the need of constantly testing the title of the transferor” (ibid.). The ramifications of law in capitalism go beyond economics. Important social and political liberties and rights of opportunity and redress have no real force in modern mass society unless embedded in formal law. 

It was for good reason that Weber emphasised the economic role of law. The movement to capitalism is a transition to validly enforced economic rules of the game, and creation of a fully fledged system of property and contract rights for the appropriation and assignation of “advantages” (chancen). In the most telling phrase of all Weber argues that rational market economies require “complete appropriation of all material means of production by owners and the complete absence of all formal appropriation of opportunities for profit in the market” (ibid). Ideal capitalism, in other words, guarantees comprehensive voluntary association and property rights while denying rights to monopolies that stifle competition. 

The broader significance of the legal domain lies with the impersonal procedural norms toward which all strictly lawful action is oriented. 

Long before Douglass North wrote in almost identical terms, Weber conceptualised property rights as “appropriation”. An economy which is oriented to profit-making is “characterised by the appropriation of the means of production by individual units, that is by ‘property’” (ibid.). The importance Weber accorded to property rights is apparent in the following passage: “Today economic exchange is quite overwhelmingly guaranteed by the threat of legal coercion. The normal intention in an act of exchange is to acquire subjective rights, i.e. the probability of support of one’s power of disposition by the coercive apparatus of the state. Economic goods today are normally legitimately acquired rights; they are the very building material for the universe of the economic order” (ibid).

Third-party enforcement of legal norms was an innovation on a par with the technological, political and organisational breakthroughs that underpinned the emergence of market societies. The incremental establishment of regulatory frameworks governing market transactions which Weber called a “continuum” of “imperceptible transitions” leading from custom, to convention and then to law will be discussed in the next two chapters.

By standardising consensual understandings and the enforcement of norms by a third party, the legal machinery of modern society has evolved in such a way that it is the most impersonal means for resolving conflicts of interest arising in the market and thereby of regulating the competitive market. 

Once economic rights have been firmly secured in a system of codes or precedents which operate independently of political party, economic enterprise, and public agency, such rights can no longer be attached to a specific individual or group in society. As in the other institutional domains of capitalism [law, administration, politics] the impersonal normative order functions to maximise the predictability of social action. In Weber’s words, “legal guaranties merely increases the degree of certainty with which and economically relevant action can be calculated in advance” (ibid). 

To be assured of predictability behaviour must be oriented to formal and impersonal norms which are guaranteed greater continuity by virtue of the fact that they are upheld by the compulsory institution of the state. 

Administrative transition: The third condition in Weber’s model of the transition to capitalism is depersonalised state administration. The rational state is one in which organisational structures and normative procedures minimise incentives for personal discretion and personal gain, and thereby maximise the possibilities of objectively calculating means and ends of public policy. 

Public administration increases its effectiveness the more it is dehumanised in the sense that officials act without regard to personal relationships, feelings, or popularity, but rather are oriented to assigned duties, defined powers and procedures, and technical competence. The power of modern officials depends on accumulated qualifications, not on accumulation of favours, sympathy or material assets. 

Because it rests on an institutionalised impersonal order the operation of official business is continuous, conducted according to established norms which ensure consistency of behaviour in a variety of public organisations. 

Individual officials, though they have specialised roles, are powerless to act alone in any undertaking of major significance. What Weber called the “abstract regularity of the exercise of authority” in ideal state administration results from a “demand for equality before the law” and the “principled rejection of doing business ‘from case to case’” (ibid). 

In short, modern administration means predictable rule-bound conduct, delimited obligations and powers of compulsion, specialisation, complete separation between the property of the official and the property of the state, and prohibition on appropriations of positions by incumbents. Thereby ideal public administration is freed of all obligations of brotherliness. Bureaucracy becomes an impersonal social order adapted to matter-of-fact calculation of means and ends. 

A corollary of dehumanised public administration is its service function. Rather than the ‘maker’ of societies and economies, a rational state facilitates individuals and groups, constraining their action only in such ways as will ensure the maintenance of the social system. Weber emphasises the minimisation of state economic functions to manageable and essential proportions which reduce opportunities for closure inside the state and collusion between economic and political interests. States that do not achieve rational procedural calculability are usually those that have gone far beyond their primary service functions, which are administration of law, natural monopoly infrastructure, and monetary and fiscal policy. 

The adaptive modern state is necessarily a small state. Its development, Weber argues, “is stimulated more strongly by intensive and qualitative expansion of the administrative tasks than by their extensive and quantitative increase” (ibid). Successful transitional states are usually those which minimise bureaucracy in order to concentrate on core service functions and power objectives. Once the organisational dynamic is properly understood, state apparatuses are seen to be highly imperfect environments from which to undertake tasks of pervasive economic management. 

Political transition: The final political condition is political representation by competitive selection. Again we need to appreciate the significance of abstract normative regularities - a) impersonality, procedural clarity and the predictability of rule-based processes; b) value tolerance of competition and individual autonomy; and c) incentives for continuous and legitimate usurpation of monopolistic power in all spheres of action. 

In Weber’s model capitalism evolves hand in hand with ‘free representation’ which attains its highest level of rationality in the modern parliament or equivalent as the representative body of political party organisations. Parliamentary democracy “shares with legal authority the general tendency to impersonality, the obligation to conform to abstract norms, political or ethical” (ibid). The distinctiveness of free representation lies in the decision making autonomy bestowed on representatives who exercise authority over people who elected them for as long they can prove their worth in the parliamentary battlefield. The distinctiveness of modern parliament lies in the transparency, calculability and impersonality of its operating procedures, and the formalities of competitive selection of both policies and policy leaders. 

Weber drew attention to the adaptive efficiency of representative democracy. Like economic enterprises in the market, political parties exercise authority and domination by a process of voluntary association, competition and compromise among vested interests. On the “electoral battlefield” there must be “rules of war” (ibid). Positions are articulated, negotiated, and legitimised in legal form. Political parties are subject to norms and procedures which, as in the ideal market, rest on compromises. Parliament itself is the competition mechanism for recruiting effective leaders. Selection by open procedure results from compromise and demonstrated capabilities. 

The moving spirit for the acquisition of power in a competitive political system is as likely to be selfishness as idealism. But the formal nature of the selection process ensures “universal human frailties at least do not prevent the selection of capable leaders” (ibid). Political preparation is achieved “through steady and strenuous work” in parliamentary committees where demagogues and dilettantes are set apart from responsible leaders who have acquired technical knowledge and skills. Formalism in political representation, as in law and administration, opposes arbitrariness. It diminishes the influence of irrational emotion. It is promoted by groups that benefit from legal empowerment rules sanctioning the usurpation all forms of monopolistic appropriation which hamper individual freedoms.

Weber’s central point is that parliaments or equivalent collegial power structures based on competitive selection are indispensable for the supervision of bureaucracies whose power would otherwise be “over-towering”. Without parliamentary supervision and control state administrations could not withstand the pressure of interest groups or they would autonomously pursue their own interests. Either way, capitalism could not flourish. 

Democracy is a requisite of capitalism in a more general sense. Competitive political representation is the formal organisational basis for securing a related interactional dynamic essential for governance of institutional domains, namely the formal separation of powers. Checks and balances ensure continuous interactivity between market ethics, law, administration, and representation. Through its processes of negotiation parliamentary bodies define and monitor the norms that regulate all policy design and policy enforcement organs of state and society. The political sphere is different from other domains in that it is where principles upon which the other domains operate are synthesised, cultivated, and upheld. In these various ways free representation is the watchdog mechanism for maintaining the interactivity of institutions in complex societies. 

… Weber’s detailed analyses of relationships between law, economics, and politics anticipates much of what now goes under the name of ‘new institutional economics’...

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References to the quotations can be found in my book. Section III to follow. As in the previous post, to make the text blog-friendly and to highlight areas of particular relevance to my continuing work on institutional change I have shortened some passages and added italics and paragraph separations that were not in the 2003 original sent to Princeton.

Michael G. Heller ©2014