The evolutionary policy maker.

Author:Groenewegen, John
Position:Influence of economic conditions and national government on market economy

Government plays an important role in market economies. Traditional mainstream economics claims a role in the case of market failures. Traditionally, Original Institutional Economics (OIE), (1) goes a step further suggesting not only a macro economic role, but also a more interventionist government as a developer of industrial and technology policies. In this paper we highlight the role of government (2) in a world as depicted in evolutionary economics. We argue that in situations of bounded rationality and radical uncertainty, government should first be a learning actor. (3) Based on a case study of Dutch technology policy, we will distinguish types of learning and identify the conditions under which a learning government can be effective.

The World of the Evolutionary Policy Maker

According to mainstream economics, governments have a role to play in market economies because markets fail. Natural monopolies, collective goods and externalities are the three basic reasons of market failures. When efficient markets exist, individual actors can take care of the coordination of transactions themselves through market contracts. Departing from the adage, "[i]n the beginning there were markets," it is argued that individuals with clear and well-protected property rights will negotiate with each other about exchanging rights until a Pareto efficient situation is realized. In this way, externalities will be internalized unless the market on which contracts have to be concluded, do not exist, or when the information is so imperfect or asymmetric that the transaction costs of contracts are too high. New institutionalists like Oliver Williamson and Douglass North would argue that in those cases, markets also fail and government has a role to play in creating a clear and stable environment of property rights, competition policy and the like. Moreover, government should create markets when these do not emerge and design transparent information structures. Government is in a special position to do so because it has privileges to create institutions like markets, to create or change the legal rules of the game (taxes, regulations) and to enforce behavior of private actors. New institutionalists would add that government should only correct the market failures when the benefits are higher than the cost of government failures due to principal-agent problems.

In institutional evolutionary economics, government operates in a completely different world: government is not only bounded in her rationality and confronted with information asymmetries, but the uncertainty actors face is of a radical nature (Hodgson 1999). Government, like the other agents, is part of an ongoing process, where no end states can be formulated and rationality is contingent and procedural. (4) Satisfying behavior holds for all actors including government. Economic processes are interrelated with technological, cultural and institutional processes. Such an approach provides insights into path dependencies and irreversibilities. In such an evolutionary world, government cannot and should not "simply" correct the failures of the market, but should play a role that facilitates guides and sometimes directs the process into socially desirable directions. The effectiveness of policy is local; it depends on the situation at hand: in one case, government should only offer options; and in other cases, it should direct technological development. Such a government is aware of its limitations (and those of the other actors) and of the dangers that processes can be captured by powerful interest groups and can become locked into undesirable paths of development. Such a government is also aware of the possibilities of the necessity to explore and to learn, and of the necessity to create opportunities. Based on their picture of the evolutionary world, institutionalists conclude that the state should "foster learning, enhance human capabilities, systematically incorporate growing knowledge and adapt to changing circumstances" (Hodgson 1999). Others add that government should allow for experimentation (Hodgson 1999, 248, 262; Groenewegen and Kunneke 2005), and create variety (Metcalfe 1995). Can we become more specific? How can government learn and facilitate learning of the other actors in the system? What are the conditions under which learning is fostered or hindered? The case below might provide some useful insights. (5)

The Case of Dutch Technology Policy: Technological Top Institutes

Historically, the Netherlands is characterized by a consultation economy in which government and "social partners" (representatives of employers and employees) negotiate about "National Agreements" on wages and price developments at the macro level; on collective labor agreements at the sectoral level; and at the micro level, stakeholders consult and negotiate on all kinds of labor conditions (Visser and Hemerijck 1997). Industrial and later technology policy is also embedded in the Dutch consultation model, or so-called tri-partite consultation structure. We observe that until the 1970s, this interactive style of policy-making developed in a relatively stable environment of an economy in which national policies and instruments were effective.

However, in the 1970s and 1980s, this strongly institutionalized consultation structure increased the rigidity of the Dutch economy, especially with respect to the labor market. Economic crisis (first and second oil shocks) forced the Dutch government, in the beginning of the 1980s, to introduce a severe and unpopular austerity policy and to implement institutional changes in the economic...

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