The research program of rational choice institutionalism is founded on abstrac- tion, simpliWcation, analytical rigor, and an insistence on clean lines of analysis from basic axioms to analytical propositions to empirical implications. Much of the research in this program actually practices what it preaches! Self-conscious and
self-imposed limits are an inherent part of the program so that conclusions can be stated in the conWdence that they can be traced back to their progenitors. For some (Green and Shapiro 1994) this is a fatal weakness. Limits, after all, are limiting.
In another sense, however, they are liberating—hence the quotation marks in the title of this concluding section. The measured relaxation of limitations is the way forward both to generalize what we already know from limited contexts and to expand the intellectual coverage of the program. Through this process the rational institutionalism program has been engaged, almost since its beginnings, in a conscious blurring of distinctions. Perhaps the most obvious of these is bounded rationality (Simon 1957, 1969; Cyert and March 1963). A second is the rise of behavioral economics and the experimental methodology closely associated with it. A third is transaction-costs economics. And a fourth is analytical narratives. I treat each of these brieXy.
- Bounded Rationality
Initiated in the early work of Herbert Simon, though also associated closely with the work of the social psychologist Sidney Siegel, bounded rationality takes the perspective that being rational is costly on the one hand, and is constrained by cognitive limitations on the other.16 Consequently, real human beings, in contrast to automatons, are only approximately rational. Their behavior reveals levels of aspiration, rules of thumb, standing decisions, stopping rules, and satisWcing. At times boundedly rational behavior can be shown to be identical to canonical rational behavior under uncertainty and costly decision-making, so it is not a radical departure from the canonical program. But it has loosened the strictures and thus paved the way for a second, more recent development.
- Behavioral Economics
This branch of rational choice examines what happens in markets and Wrms when individual agents are cognitively constrained. Perhaps the most inXuential work in this area was stimulated by the ground-breaking research of two psychologists, Daniel Kahneman and Amos Tversky (1979, 1981). The emphasis here is on rationality qualiWed by psychological limitations—loss aversion, framing eVects, hyperbolic discounting. This work is only just Wnding its way into the rational institutionalist research program, but again is an illustration of how the bright line between canonical rationality and psychological reality is fading.
- Transaction-cost Economics
This work has its origins in the seminal contributions of Ronald Coase (1937, 1960) and applications of his ideas (along with those of students of bounded rationality) by Oliver Williamson (1985). In this work the fundamental unit of analysis is the transaction and the fundamental institution of transactions is the contract. Emphasis is focused on the costliness of searching for transaction partners, drafting agreements, anticipating contingencies of relevance to the agreement, devising mechanisms to interpret agreements in novel circumstances, policing and enforcing compliance, and dealing with transgressions. Exchange, in short, is neither automatic nor cost-free. It requires institutions of governance. The economic institutions of capitalism, to use Williamson’s phrase, are in eVect political. Running a Wrm is governing a Wrm. Implementing a contract requires a framework of governance. The structure of a Wrm provides a framework for ‘‘private politics.’’ And economic exchange, properly understood, is political to its core. Economics segues into politics. This is no more apparent than in Weingast and Marshall’s (1988) transaction cost analysis of the organization of legislatures.
- Analytical Narratives
A Wnal blurring of distinctions attacks the line between rational choice institution- alism and historical institutionalism. Separately and collectively, Robert Bates, Avner Greif, Margaret Levi, Jean-Laurent Rosenthal, and Barry Weingast, have developed the analytical narrative as a case-oriented methodology for studying institutional development in historical context (Bates et al. 1998). The object of analysis is an historical case—economic growth in medieval Italian city-states, conscription, the institutional origins of the American civil war, the coVee cartel in Latin America, the historical evolution of European absolutist regimes. What distinguishes this approach from mainstream historical institutionalism is the use of analytical models—a spatial representation, a game form, an optimization set-up—as a framework in which to embed the case. An analytical narrative is a
case study but there is an underlying model that motivates analysis and frames the empirical materials.
Rational choice institutionalism began as pure theft, lifting analytical tools from mathematics, operations research, and economics. In its focus on institutions in politics, economics, and society, it developed boundaries, a canon, and an identity. Some of this has been surveyed in this chapter. The program has prospered but is not without its critics. Many have felt, almost from the outset as the quotation from Clark that introduces this chapter suggests, that the assumption of rationality is too demanding; developments in bounded rationality and behavioral economics are responding to this. Some believed that even canonically rational actors would have trouble in the world of politics living up to the expectations of the invisible- hand standards of market exchange; explorations of transaction cost phenomena attempt to deal with some of these frictions. Still others emphasized the ahistorical quality of rational choice institutionalism; history dependent and contextualized aspects are now a part of game theory, and rich historical cases are now examined in a rigorously analytical fashion.
In defense of the early program in rational choice institutionalism, it must be acknowledged that a paradigm, as Kuhn (1970) reminded us, develops protective boundaries in order to permit normal science to progress. Rational choice insti- tutionalists were no exception, diVerentiating their product and pushing its para- digmatic assumptions as far as they could. Eventually, however, some of the criticism is constructive, it begins to attract attention, the boundaries weaken, and practitioners seek ways to accommodate what they had formerly rejected. I believe this is the current state of the program in rational choice institutionalism. It is increasingly responsive, not imperialistic, and the distinctions between it and its institutionalist cousins are beginning to weaken.
