Trajectories of institutional changes, transaction costs and time

The main problem of institutional planning in changing economy. Time as a transaction costs. The situation when the firm opens an absolutely independent area is one of the forms of the enterprise's behavior in the conditions of market competition.

Рубрика Экономика и экономическая теория
Вид статья
Язык английский
Дата добавления 30.03.2017
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1. The problem of institutional planning in changing economy

Little is done in economic science and, more specifically, in institutional theory in the area of institutions planning, controlled replacement of one institutions by the others and the choice of prevailing condition of institutional dynamics (“dependence on the past”, “independence on the past” or partial dependence on the past). The majority of macroeconomic models proceeds from the minimum impact of the institutions on economic dynamics and decision-making. They do not especially consider the stylistics of institutional changes, both of internal, and external nature (transplantation and institutions adoption). Agents adaptations to new rules or change of the old norms, which are updated or corrected due to this reason (in particular, the time of such adaptation defining the qualitative level of compliance or obstruction of the given norm or set of norms), are not considered, as a rule, by modern macroeconomic science. In the modern economy, at least, in the most developed countries, the frequency of institutional changes and political decisions provoking such changes considerably outstrips the possibilities of the agents to carry out action and tasks in view and to achieve some result. Therefore, introducing any institution, planning or adopting it, it is necessary to consider the reactions of agents and other institutions which are designed to cooperate with the introduced institution. The research complexity of the given process is in the fact that even at introduction of one institution, its interactions with the set of other institutions are difficult for foresee. The analysis should be of very specific character, and institution efficiency will be defined by the fact to what extend the agents will be interested to follow it, to execute this rule, what transaction and production costs will thus arise. Besides, generating additional transaction costs or economizing, the institutions change production costs. By the way, for this reason at money supply change in the economy, inflation changes differently as institutional structures and production in these countries differ. In this connection, unified approach to economic policy, including reaction to inflation, will hardly be possible.

New institution appearance or correction of the old one and adoption redistribute the time structures of the agents who are to force to carry out this rule. If, as a result, the time structure of such institutional changes undergoes radical change which shifts agent's motivations and shifts his preferences, the impact of such change will be defined by combined reaction of agents.

In my works I introduced some criteria which institutional planning should be based on. They are: goal-setting, defining the area of efforts application, functional variety, costs of institutions and agents functioning which arise at introduction of new institutions, time of institution functioning and time before its change, replacement, abolition or correction, stability to external changes and stability to spontaneous mutations, and also monetary provision of introduced institution functioning. And the last principle is not the same as the expenses for institution functioning. It is rather expansion of monetary provision which arises or does not arise at the introduction of the institution or necessary monetary provision in unit time, needed for the most effective institution functioning and execution of the required functions by it.

But what can be considered effective functioning? Low costs of the given institution compliance? And if the costs are not high, monetary provision is sufficient, and the agents do not carry out this rule, ignore it, then, in this case the institution is as though not visible in the institutional field of economic system. Then, it is meaningless to speak about its efficiency. If institution's functioning costs are not high, and the existence of this institution sharply increases agents' expenses, that causes refusal to follow this rule in a due projected variant, there is an institution dysfunction, which is the characteristic of its inefficiency. Often it is immanent inefficiency.

At the same time, it is necessary to notice, that the important moment is defining initial institutional qualities of the system, its dysfunction degree on basic institutions (rules), and, besides, requirement clarification on some changes and institutions, including the possibility of institutions adoption and their transference from different social and economic environment. In other words, institutional planning is the algorithm, the grounded control sequence of institutions, their introduction, creation of adaptation conditions to new rules, replacements, adoptions, and etc. It is and it should be an integral part and the core of state planning, but it can be carried out at the government level of the country, legislative bodies, at the regional power level and even at the level of a firm and a separate household which develop the rules of their functioning and daily economic decisions making. Certainly, institutional planning has specific character and significance at each level. Laws passed by the parliament have higher priority and force in comparison with the legislation in a certain region. However, according to the enforcement force or law execution, the regional legal act can have a clear advantage, that is, the federal law cannot be executed, and the regional one can. There can be other scenario, a reverse one. But summing up, it is necessary to say that institutions have different force and purpose. They regulate the same processes in economy, so that the total effect of their impact is difficult to estimate. Besides, when we speak about the different conditions of institutions development, we use the terms of dependence, independence on the past and partial association with the past. That means that new institutions show three specified conditions of association with the old institutions. Actually, it is possible to ascertain the presence of this or that condition probably only on one separately considered institution, but if we consider the interaction of all institutions with each other, and in a society there exists a single institutional area of this or that organization degree, it is improbable enough to speak about independence on the past even under conditions of revolutionary changes. And the condition of dependence on the past and partial dependence is a trivial expression of what is observed in life. The appearance of new technology and technics, on the one hand, represents a certain revolutionary change, because if the scale of such change is considerable, change of the mode of production, higher productivity and technological enhancement are observed. On the other hand, the new technics and technologies generate the new rules, actions algorithms, including those connected with the maintenance of this equipment. But maintenance algorithms of old technical analogues are present in these rules, because whatever the technical breakthrough was in the development, nevertheless, technics generations replace each other more or less consecutive, according to the logic proceeding from engineering sciences, physics, chemistry and other exact academic disciplines. Therefore, dependence on the past is always present, as knowledge augmentation and appearance of new knowledge occur in such a way. As a rule, it happens on the basis of the previous accumulated knowledge. Even paradigmal breakthrough is carried out on the basis of criticism, which presupposes the detailed study and comprehension of former knowledge paradigm.

The basic question of institutional planning is expenses estimation. Projecting institutions, it is much more difficult and sometimes it is simply impossible to estimate expense precisely, unlike designing technical assemblies, device, machine components and items. The reason is that it is not known in advance how the institution will work, how the agents will follow it, and how functions, foreordained to this institution, will be carried out. To estimate in advance the expenses for the performance of a certain function in the period ahead is the basic complexity. The cost of materials, mechanical and other processing, electricity, labour expenses is known at present and can be estimated for the future period, but it is very difficult to do the same operation regarding institutions and their functions. Value analysis can be used at estimation of such expenses. Nevertheless, the expenses connected with institutions functioning arise due to the interaction of various institutions with each other and interaction of institutions and agents. This circumstance creates the named complexity. However, economists-theorists are not familiar with such analysis and, as a rule, cannot apply it. On the other hand, value analysis is, certainly, not a panacea as it is not prognostic. That is why to foresee, what the expenses will be, is difficult and even impossible. It is one of the reasons of how unpredictably institutional changes influence economy development. They can both improve the system functioning, and worsen it. Hence, there are several additional criteria of institutional planning. They are: the necessity of control over the institutional change (substantive objective part of institution and its functional filling), speed of changes, including the speed of a certain introduction in the economy (probably, stage-by-stage introduction of increment character) and agents' adaptable possibilities, whose estimation is also difficult, especially for the future. To ask a question concerning the change of agents' adaptive properties is just the same as to ask, whether the mentality and psychology of their behaviour will change. Similar reactions and changes depend on too large number of factors, including agents' health, labour burden and ergonomics, the total time during which the scale changes take place causing weariness and absent-mindedness of agents' reaction.

Too big requirements to institutional planning increase costs of the planning process and its complexity, form special knowledge in this area. The circumstance, that the introduced institutions for various sectors of economy should possess their own properties is a specific feature of institutional planning. There is an analogy with the firm. If some algorithm or management procedure within one firm or company are applicable and provide notable efficiency, we can see absolutely opposite effect in the other firm. This procedure will not work at all, and management algorithm will be inappropriate or will not be realized. Besides, general and unique rules, their own schedule of work, decision-making procedure and ways of achieving the desirable result operate in each firm. The general rules are usually standard, they result from federal or regional laws regulating the work of the firms or property relation, taxation and etc. And as for the decision-making procedure and the internal organization of work, it is up to the firm's management and the proprietor. As it is impossible to replace funds and firm personnel completely with the magic wand any changes of rules in the firm always assume a mode of dependence on the past, as both funds and the employees make up the basis of this firm. Thus, decisions making style, realization of specific tasks and work in this or that form always remain and cannot be quickly changed, especially, without corresponding retraining. It seems to me, that the mode of independence on the past is an artificial model of individual changes for certain types of institutions which in practice can be seen extremely seldom. Even the revolutionary changes of public system similar to those observed in Russia in 1917 and in 1991 did not assume independence on the past, despite force and purposeful liquidation of former institutions and their full replacement with the new ones.

Of course, the tools used for this purpose, were absolutely specific and were not applied earlier as the world history had not known similar transitions-revolutions. Nevertheless, we can hardly name such transition independent on the past. But the dependence degree is quite a different thing. It is also necessary to notice, that according to the criterion of accumulated knowledge economic development is always dependent on the past. First of all, I mean sciences, technology and engineering. Certainly, knowledge in the field of social sciences also possesses the property of accumulation and storage. However, their use can be quickly depreciated by these or those circumstances.

Thus, there is a dependence on the past at the system level, only the scale of its manifestation is different. In technology and for certain institutions it is always possible to give an example, when this dependence is broken or becomes not such obvious, that is, partial.

In my opinion, at institutional planning, it is important to take into consideration what mode and what trajectory of institutional development are set for the public system. Thus, the answer to the question about the costs of such trajectory, institutional corrections and imitations costs (transferring of institutions from other socio-cultural and organizational-economic environment), agents' adaptive possibilities and adequacy of their reactions has primary importance. Further we will consider the conditions of institutional development, principles and effects.

2. Conditions of institutional development. Dependence on the past (path dependence)

When a new product is made in the firm on the basis of the available fixed capital and technological possibilities, or a new mode of rules regarding functioning or units interactions, interfaced to the former rules or the director's directions and following them, is introduced, it is an example of the development dependent on the past. Then, it is possible to present the new condition of the firm/system as a certain initial condition plus the change which either can have non-random character and be a result of peculiar institutional planning, or can have random character.

If at the country's level the legislation change is carried out with the account of the former norms, the new norms logically grounded follow from the available institutions, it is an obvious model of the development dependent on the past.

If the agent leaves the family, thereby, destroying economic and organizational structure, and creates a new family, but not only financially supports the former one, but also takes care of children left, keeps in touch with the former wife, though during short contacts, it is an obvious model of the system's development dependent on the past. In the case, when the agent leaves the family and does not know even about the destiny of the children left, this scenario is obviously an example of independence on the past. Certainly, there are such models in the society, but it is a question if they prevail. Most likely, this question is important from the point of view of prospects estimation of public system movement, but to answer it is difficult enough without recourse to the methods of sociological, psychological, and also historical analysis.

From the point of view institutional analysis it is advisable to estimate the development trajectory and the state of institutions in each particular case. And it is desirable to apply unified estimation criteria for different countries, firms, organizations and institutional systems.

While planning institutions, it is important not only to provide a mode of , say, independence on the past or partial dependence, but to consider the time of institution introduction, the moment of the highest efficiency of this institution and the necessity of future correction or replacement of the institution after a certain time. Such decisions and plans will be possible, only if it is possible to estimate agents' preferences and change of their motivation in connection with the introduction of a certain institution or institutional substitution. For the time being, the situation in this field of activity and economic planning develops more stochastic than well-considered and successively.

Under conditions of market competition, the situation, when the firm closes down separate productions and opens absolutely independent area or workshop creating a product with which the firm enters the market, will mean the form or model of the development independent on the past, as absolutely other funds and the personnel are used in this workshop, and the product is not stereotypic for the firm.

If there is a change of ownership in the country from the public property to the private one (it is the question of superiority and prevalence of one institution over the other), it is possible to speak about the basic change of economic development and the change of institutional form of the development. In this case the socialist form of development changes to the capitalist one, presupposing private property supremacy on the means of production over other kinds of property, including the public one. Collectivist institutions are replaced by individualistic institutions, with all the following consequences for agents' motivation and economy structure. The public sector is reduced, the private one increases usually for the account of resources of the public sector. A number of fetishes, ostensibly having scientific grounds, namely a myth about competition efficiency, is brought home to agents' consciousness. Institutions are adapting to the conditions of such mythologization. Why a myth? Because a competitive model exists only in the “the blackboard theory”, which does not take into account the institutions and creates absolutely unfeasible structures, like homogeneous product and a large number of sellers and buyers. In reality, there are not many manufacturers and even traders of homogeneous product. Arising product variety and, besides, the impact of mass media eliminate the principle of consumer's independence and actually model the demand and create it for itself. Hence, the consumer becomes dependent on circumstances and institutions, and competitive model is a fiction which is difficult to imagine even existing on the paper as firms possess unequal funds (according to deterioration, structure, condition, productivity and etc.), unequal personnel (according to qualification), intellectual capital and etc. The principle of independence on the past is realized within the limits of certain administrative (political) decisions which break the link with the old institutions, reject them for some reasons and introduce the norms, apparently, in no way connected with them. Actually, even the absence of any link means the presence of link by means of decision-making institution. After all, the rupture does not arise by itself. Usually, in this case, it is projected by making of corresponding decisions for the specified model of institutional developments and trajectory of independence on the past.

As it was already marked, if the agent leaves the family and doesn`t keep in touch with neither the children, nor the former wife, it is an example of the change of independency on the past. At independence on the past, there appears the greatest costs of rejecting and resistance to the new rules which are connected with the previous rules in no way. The reason is agents' frustration, reduction of expectations, or their major modification, sometimes sharp decrease of adaptive possibilities and reactions adequacy. At independent on the past institutional changes, first of all the adaptation mode is broken and the reaction adequacy is undermined, to be more precise, it is simply not manifested, because the agents do not understand how to react to the changes.

How should the trajectory of partial dependence on the past be presented? Most likely, for a firm it means creation of new products on the basis of the updated funds, additional involved personnel that will allow creating a new product and developing the new markets. Besides, the firm preserves fundamental rules of the work without changes. With regard to the country, that is, a big economic system, the vestiges of the previous structure or formation remain. By the way, thereby, structural approach, whether obvious or not, but assumed the presence of such trajectory of development, that is, dependent on the past or partially dependent. As it is difficult to define the degree of dependence, it is necessary to have quantitative criteria. And owing to the fact that the public system is very complicated, it is problematic to pick up unified and aggregated indicators. Then, in essence, the specified principle of path determinancy is a version of the dependence principle from the past because there is such a dependence, and the problem is in the definition of the dependence degree.

What does the term “past” mean? Is it the previous period? Obviously, no. It is not simply the previous period, but the whole development period during which the society has accumulated certain knowledge and institutions. Of course, to obtain a certain model of institutional development, it is possible to choose the time period for analysis. From the position of such interval introduction it is pertinent to speak about the period preceding the institutional changes considered. At the same time, at singling out the development periods and, in essence, classifying them in the form of periodization (for example, with reference to technics development, technologies, key economic branches, energy resources and institutions), there will always be a dependence on the past, but the scale of changes and new possibilities arising on the basis of new technologies and technical devices create the impression of independence on the past, and similar changes arising are described with enthusiasm in scientific literature as “technological revolutions”. But these so-called revolutions are prepared by all the experience and knowledge concentrated on certain directions of production. What costs does this or that trajectory of institutional development give? Does it reduce their institutional planning and in what degree is the dysfunction of institutions and economic systems caused by this or that condition of institutional development and its trajectory. There simultaneously appears the problem of systems and institutions dysfunction decrease, including the decrease at the expense of institutional planning. If we introduce the estimation of the system (institutions) state according to a parametre or group of parametres Sn, supposing, that this is a new state, and consider the previous state to be So, it is possible to write down:

Sn = So + Sp + е,

where Sp - the increment in the system/institution according to state parameter; е - accidental disturbance in the system.

In the case of dependence on the past, value Sp is not large, and So is large in the presented formula, so it is possible not to take increment Sp into consideration, that is, Sn = So + е. In the general case the formula is complete, even at dependence on the past. If there is a mode of independence on the past, then So =0, that is, the previous state affects in no way and does not matter for the further system's functioning, and only increment at institutions Sp and the accidental, stochastic changes specified by е are significant. For path independence we have:

Sn = Sp + е,

at very strong dependence on the past. It is possible to expect, that the stochastic component will be minimal, so that in the general view it can be neglected (for example, a special mode, under conditions of centralized planning) and then:

Sn = So + Sp.

The lower the dependence on the past, the higher the increment Sp. The higher the dependence on the past, the lower the value Sp. Graphic representation of development conditions is shown in Figure 1 in coordinates So-Sp.

Figure 1. The relationship of institutional development conditions

Development costs for each trajectory should be estimated individually in each instance. The combined costs of institutions' functioning will be summed up from the costs of already operating institutions, costs connected with the increment, that is, new institutions introduction or correction of the old ones, and also from the costs generated by accidental changes. In other words, passing to transactional costs (Tr) we will write down:

Trn = Tro +Trp + Tr е.

It is necessary to notice, that besides transactional costs characterizing the rules functioning, institutions cause process costs which should not be separated from the transactional ones, because there is a connection between various activities in the economy, so that one activity generates the other, or, on the contrary, prevents the appearance of the other activity. In any case, the structure of transactional costs becomes important, that is, shares of transactional costs generated by the previous institutions (Tro), new institutions (Trp) and the so-called costs arising stochastically in the course of institutions interaction (Tr е).

In idea, institutional planning should proceed from the possibility to define the parametres ratio of the costs, that is, at correction or introduction of a new institution, the proportion is subject to the estimation (let it be in some prognostic variant) Trp / Tro, Tr е/Tro and Tr е/Trp. The estimation of these correlations allows understanding, how institutional changes provoke economy expenses, costs of institutions functioning, and, besides, the subsequent change of process costs, because production “subordinates” to rules and norms. Institutional changes are characterized not only by the change of transactional, but also process costs. That is why, it is impossible to measure institutions efficiency and institutional changes only by transactional costs. At creation and introduction of new technologies the similar estimation will also be useful because the new technology can be considered a new institution, because it generates or alters a number of previous rules.

If Trp / Tro> 1, then it may not be worth carrying out a new institution or institutional change, because as a result the system with higher transactional costs will be obtained. It is an original criterion of “decision-making” at the replacement of institutions or estimation of institutional changes of specific content. The general growth of transactional costs during economic systems' development, as well as the general growth of other costs are not specifically the criterion of efficiency of the change, but they reflect the growth of complexity of world economic system and its expansion.

If Trp / Tro <1, the expediency of changes is more or less reasoned, because thus, it is necessary to consider other two proportions. When Tr е/Tro> 1 at Trp / Tro <1 and, as consequence, Tr е/Trp> 1, then we have a situation, when institutional replacement or correction is reasoned, but the speed of replacement, or the arising interaction, generating a high level of stochastic transactional costs act as the criterion interfering the behaviour of such institutional changes. The way out is incrementality of changes, the sequence and decrease of stochastic costs, that is, “institutional leapfrog”. The conducted analysis introduces additional requirements for the substantiation of necessary institutional changes and replacement of one laws by the others. Really, why is it suddenly required changing any rules? How is their inefficiency proved? Are there enough complaints of other agents - the lobbyists or public at large? By means of this reasoning, it is possible, to some extent, to give the grounded answers to the questions interesting for us. The model of institutional changes is presented in.

If two or more possible trajectories of institutional developments are subject to estimation, what trajectory should be chosen and how? In other words, which of the trajectories will appear more or less chreod? First, it is necessary to give an idea about creodity of the development trajectory, secondly, to present perspective dynamics of transaction and process costs generated by both trajectories. Such approach is necessary, but it is insufficient, as this or that trajectory generates possibilities of different level, and then, they are to define the mode of technological development of the economy. That is why, the trajectory choice also presents both an estimation problem of qualitative development parametres, defining of development basis in the future and selection of methods for its formation in the current variant of economy functioning.

3. Chreod effect

This effect means that the development of the system, or its separate elements goes on inefficient trajectory. The estimation complexity of the system's development or the development of its elements is caused by the difficulty to ascertain what alternative was possible and how much it is better than the observable direction, if there is movement in any direction or scenario. Hence, the comparative aspect of efficiency and system's efficiency evaluation is the challenge in analyzing the trajectories, development strategy and the description of chreod effect. The reason is that the reliable estimate of the trajectory, especially of two or three possible trajectories of movement, is possible, provided that the system or its elements develop on the specified trajectory. It is difficult to imagine movement according to several trajectories at once. It is equivalent to the fact, that the system or its elements have some lives and live these lives simultaneously. Such variant of development is improbable. For this reason, it is difficult to say, that if the system began to develop the other way, the results would be better, and prospect and suggested future variants of the development would be more encouraging, than the selected variant. Specific feature of chreod effect is reduced to the fact, that the inefficient trajectory of development is fixed, the agents and control system of the society being not able to understand and consider this development as inefficient at any interval of time. Moreover, there can be a full impression and be a fixed opinion, including the opinion of scientific economic circles, about high utility and efficiency of such development. If any branch of development is recognizeв as less effective or inefficient, it means, that the researcher has exact techniques (estimation methods) of efficiency measurement of this and alternative development trajectories.

To define chreod trajectory of economy development is a challenge because sometimes it is even difficult to say, which mode of development (path dependence (dependence on the past), path independence (independence on the past) or path determinancy (partial dependence)) will be chreod and which is not. Probably, it is necessary to approach this question, proceeding from the principles of institutional planning which were discussed here. And to add perspective costs estimation and qualitative parametres, which experts can give. We will estimate these three basic scenarios by the criteria (See Table 1), on which I developed the concept of institution dysfunction and economic system dysfunction in my early works.

Table 1. Characteristic of institutional development conditions


Institutions Development Trajectory

Path Dependence

Path Independence

Path Determinancy

1. The trajectory purpose

To provide effective functioning of old institutions (institutions correction only on the basis of the previous rules)

Full refusal from previous institutions, development only at the expense of new institutions

Introductions of new institutions with preservation of old institutional forms

2. Area of efforts application

Development of old institutions at the expense of small corrections - old institutions

Creation of new institutions at the expense of their massive input - new institutions

Combination of old and new institutions

3. Functional filling

It is defined by old functions

It is defined completely by new functions

It is defined by the combination of old and new functions

4. The period of time before the change

Depends on scale of dysfunction of old institutions

Degree of rejection of new norms is defined by adaptability and adequacy of agents' reactions

Depends on cumulative effect of interaction of old and new rules

5. Functioning costs

Relatively low, at acceptable total efficiency and in the case of very low efficiency it can be high. Then there is a necessity of the other modes of institutional development

The highest

Relatively high

6. Degree of rejection or acceptance of introduced norm

It is low, as new norms are hardly introduced, that is, the new norm can be unnoticed or it can be high, as old rules predominate

It is very high, in the absence of the necessity of new norms. At the presence of such requirement, it can be relativelynot high

Acceptable variant. Average rejection degree

7. Mutation stability (stability measure of the system to its transformation to any other form)

It is steady

It is not steady

Variable stability

As we see from the presented characteristic, the most unprofitable, the worst predicted from the point of view of changes quality is the mode of institutional development independent on the past, path independence.

It is this mode that can be considered having chreod effect, though at the disbalanced system the vector, helping it out to absolutely new advances, can be found.

4. Heterogeneity principle

Heterogeneity principle demonstrates that economic changes referring to the systems of various complexity result in greater adaptability of the systems which show greater heterogeneity. Heterogeneous, elements should raise system's stability to exogenous impact, because if the system is presented by one element having certain negative exogenous influence, affecting this element, then the whole system is under this impact, as it consists only of this element. In other words, this element is the system. In this case stability is not high, because one element is affected. If there are some elements, this impact can be distributed, and system's stability increases, because other elements compensate losses in any link or system's element. Even if the system loses one of elements and its stability obviously decreases, the system will keep the working capacity. The analogue is amputation of one of the limbs, or one of organs (for example, lung, kidney), but the patient's life is preserved. At the same time, despite high heterogeneity, there can be elements in the system, whose presence can destabilize the whole system and dramatically undermine its stability and viability. To continue the analogy with the human, it is possible to name such organs as brain, heart, liver, whose functioning destabilization can stop the work of the whole body and cause death. And again, at certain heterogeneity of the system, there are basic elements which can be some exceptions out of the principle. In economy such reservation is also pertinent. Thus, it is necessary to admit connection between the degree of system's heterogeneity and its adaptability with obligatory specification, singling out of subsystems which occupy the central position in the system and whose destabilization will result in organic changes in the system functioning, or its liquidation. Stability of the system also depends on the number of such subsystems. The more homogeneous is the system in this sense at its general heterogeneity, the higher its stability is.

In essence, institutional planning should be aimed at the solution of the specified problem: what institutions are to be introduced and how, to have the organizations in the system possessing homogeneity in the sense of power and its distribution over and in the system at its general heterogeneity. In other words, it is absolutely not enough for the system to be simply heterogenous, that is, to consist of considerable number of different elements. It is important to eliminate heterogeneity in the system's power, because, then, there will be automatic elevation of one elements over the others and there will be structure disproportion of the system that can shake its stability.

Under stability of economic system we will understand the possibility to return to initial functioning parametres at arising deviations from them due to these or those factors and conditions. If the system is in poverty, will we consider the functioning mode unstable, when the system tries to leave poverty parametres? And will we then recognize the mode as steady at the return to poverty? These two questions demonstrates at once the relativity of the stability concept with reference to economic systems. The condition of both poverty and wealth can be steady. And, of course, in strict sense, transition from one steady parametres of functioning to another should be considered as the unstable state even if, eventually, it is connected with the improvement of the general level of system's development. In this case, management of transitive dynamics should be considered as the unstable state, or to be more precise, as the change of consecutive unstable states of the system. By the way, during such dynamics, the system can be thrown back to higher level of poverty, or a steady mode of permanent stagnation without reaching the higher development level.

System's adaptability is the ability to follow a certain trajectory and rules which are foreordained for agents' execution. The more exact this following is, the higher the adaptability level of the system. At high adaptability introduction of new institutions finds the agents who follow these rules. It does not matter whether these institutions are adopted or created due to the design of domestic political system players. Thereby, interiorization of institutions happens in economic behaviour. Certainly, it is necessary to notice, that institutions provide system's heterogeneity, both regarding the elements, and distinctions in behavioural models of the agents' adaptation. Exact agents' execution of the rules is present, but I should not say, that it is of total character. Basically, a certain deviation from exact performance of rules is constantly observed, and institutions lose various functions with which they were provided initially. I call these processes dysfunctions of an institution or an economic system. Dysfunctional states penetrate the economic system and, without any doubts, arise not only and not so much at institutions' adoptions, the so-called transplantation, but spontaneously, in the course of interaction of various institutions and agents just as a flu epidemy, or other diseases, including the ones caused by organism ageing. They raise the dysfunction (working capacity) of agents, reduce their life cycle. And they appear because they are present in life, and agents' contacts and experienced loads promote their aggravation and dissemination. Thus the functional potential of the system is reduced, as a rule. Under functional potential we mean the set of useful functions whose execution is expected by the agents and which at a normal mode of system development should be executed.

5. Hyperselection effect

It means that inefficient agents or institutions, low competitive, can hold their positions in the market not allowing more effective and highly competitive agents to enter the market. It is an example of negative natural selection. In this section we will demonstrate the model within the framework of a game between a grand master and a second-rate player. It is a striking example of the consequences of negative selection in the economy provoked by permanent institutional changes.

Hyperselection effect is very vividly revealed while considering functioning of hierarchical chains when the top level of the hierarchy subordinates the lower level, selecting it in such a way that the properties and qualities of the lower level correspond to the point of view of the top level. If the advancement on the hierarchy, that is, agent's career growth, depends on such a motive, then the lower level will practise the model of adaptation for the problems, purposes and preferences of the top hierarchical levels. When the top hierarchical level feels competition from the lower levels which are more knowing and competent, it will undertake all the measures not to admit the advancements of the agents from these levels to higher positions in the hierarchy as it represents the threat for the agents who are at the top, undermines their competence, narrows the powers and possibilities, increases transaction costs of agents' interaction and complicates stereotypic functions performance and decision-making. Because of this circumstance, negative selection works when more servile and appeasable agents, who suit the top hierarchical levels are put forward on higher positions. The criteria of age and professional suitability, as well as the criterion of personal honesty and decency are not considered. As a result, all the control system loses its prior potential and regenerates invisibly for itself. Of course, it carries out certain tasks, makes the decisions, but not with such possible efficiency that would have been in case of absolutely different motives and stimulus of personnel selection for corresponding hierarchical management levels. I have just described the mechanism of management dysfunction, in the basis of which we have the negative selection fixing the least successful forms, including the use of personnel administrative potential.

Hyperselection effect answers the question regarding how inefficient trajectory of development works, that is, how chreod effect operates. Thus, there is a certain relationship and interdependence of these effects. The trajectory choice of institutional developments is reflected in Table 2.

Table 2. Trajectory choice of institutional development and hyperselection

Costs relationship

Path dependence

Path independence

Path determinancy

Trp / Tro> 1



Transition state

Trp / Tro <1



Transition state

Trp / Tro > 1

Equiprobable choice

Equiprobable choice


The sign “+” in the Table means the prevalence of this trajectory at the given ratio of transactional costs (conditionally optimal), without the account of stochastic component of these costs which can greatly influence the trajectory choice. Positions where there is prevalence of hyperselection effect at the formation of the development trajectory mean a possible choice of such trajectory even at the specified costs ratio. What does it mean? It simply means inefficiency of trajectory choice and inability to plan or low planning efficiency. Specification of costs relations adjusted for stochastic component of transactional costs will allow specifying the optimum choice, but will not cardinally change our conclusions.

The problem of institutional planning consists not only in the fact, that it is necessary to consider different effects, not only in the search of the solution, whether it is necessary to overcome hyperselection effect and “lock in” effect which we will speak about further, but also in defining various costs from operating and introduced or corrected institutions. Thus, current and future costs are subject to comparison. This creates a known problem of such proportion estimation. It is not easy to foresee the costs of new institution functioning or correction of the old one or status quo preservation. Besides, it is necessary to consider the overcoming costs of accustoming to the developed rules, costs on adaptation and formation of new motives of economic behaviour in other rules structure.

The trajectory choice of institutional developments is interesting because, as a rule, it does not occur according to the strict criterion or a certain relation of expenses. That is, chance plays here a leading role. No person, vested with the power, has those methods of institutional planning and does not consider the criteria discussed here. In this connection, it is even difficult to say that if this or that scenario is realized, the costs relations will be like this or that, but not the other. Though, the probability of the fact that costs will be strictly defined is, certainly, high. In this case, it turns out, that the agents making the decisions and building a trajectory of institutional development are motivated by the relations of costs. In some cases this motive will be far from dominating.

6. “Lock in” effect

This effect is connected with fixing of inefficient institution's state, or agents' behaviour model which assumes compliance with some rule. The “lock-in” effect and its interpretation, which becomes classical, says, that the decision once made is difficult to cancel, reconsider and sometimes even to correct. There are a lot of such decisions in the economy. In particular, such decisions are characteristic for technological sphere when we can ostensibly see a competitive victory of one technological solution over the other. But in reality there is simply an error in decision-making and an inefficient alternative gets the upper hand over the more effective alternative. What is the reason for fixing inefficient choice or inefficient state? It is in the inefficient norm or institution, this institution steadily functioning. Such interpretation was called an “institutional trap”. However, I repeatedly stated that this term and the description of this state are less accurate, than the term “lock in” effect, or institution (system) dysfunction. The problem is that, being dysfunctional, the system or institution entirely keeps its viability, like a person. That is, such functioning mode, despite frustration or loss of necessary functions is self-supporting. That means, it demonstrates this or that degree of stability. Dysfunction is a dynamically variable parameter. It can be higher or lower for certain institutions or systems, it can rise or decrease due to various factors. The majority of institutions are dysfunctional to some extent. Only few of them function with 100 % execution of the functions necessary or intended for execution. Some functions regenerate and new or uncharacteristic functions are fixed. This also reflects their dysfunction.

The fact that inefficient agent or institution gain a competitive victory means hyperselection effect and fixing of such situation means “lock in” effect. In other words, hyperselection effect is responsible for dynamics, and “lock in” effect corresponds to the statics of selection of institutions and administrative decisions.

Institutions suffer from the change of their functional content, purposes substitution, efforts application areas, change of activity costs connected with the behaviour and agents' motives of norm execution, stability, and the time before the change of rules or introduction of new rules. Institutions dysfunction is the reason of lock-in effect. It is the decrease of institution's system efficiency and its dysfunction, which is difficult for the agent to distinguish. Besides, it makes the institution inefficient, but quite executable. We should not refuse such institution, because the costs of refusal, training and switching to other institution do not guarantee, that this new one will not quickly lose its efficiency (If only such replacement is possible. Usually there are no duplicating institutions. They are different and functionally variable.). As a result, the other functional set is just formed, and to compare different institutions, especially the phenomena presented in institutional form, for example, corruption and legal behaviour, is improper.

Steady inefficient norms have different inefficiency, and the phenomena regulated by many norms, are also characterized by a certain system efficiency/inefficiency. But here the phenomenon scale in the economy becomes of importance. It is important, whether it increases or decreases. This phenomenon cannot be reduced below any level, that is, it does not matter how dynamically the number of transactions changes, it will stop at a certain figure. This figure depends on many conditions and institutions operating in the economy: on its infrastructure and even cultural imperatives, the general development level, income per capita and etc.

In engineering and technologies dysfunctions are also possible, but their manifestation is specific. One of the examples is qwerty-effect.

7. Time as a resource and transaction costs

Evolution is considered, to be irreversible, and time cannot be turned backwards. The majority of economists-representatives of the evolutionary theory, probably, agree with this viewpoint. However, the area of institutional planning and institutions is such that certain rules can be subject to cancellation, change, the actions carried out with them being able to have quite reversible or, at least, partially reversible character. Certainly, it does not mean, that it is possible to turn the evolution vector backwards. People grow old and die, leaving the created blessings to the next generations. The generation gone and human potential quality including educational level, ethical basis of behaviour, habits and customs are difficult to restore. It is usually impossible to replace or create absolutely the same individual properties. That is why, with loss of a great scientist the researches direction and thinking stylistics, which influence education and training of the following generations, are also lost. Agents' replacement creates the new public structure and new quality of inter-agents interactions. Thereby, new life quality, new edifice on life, blessings and development prospects are formed. Accompanied by the changes in engineering and technologies, the specified changes transform economic behaviour. Even if certain rules are cancelled or reconsidered with the exact return of the rules existing before, that is, there is a return movement concerning separate rules, the evolution vector as a whole remains irreversible. There is a new quality of relations and development even if nothing as though changes. Really in the social evolution, on the one hand, changes are more intensive, than in physical and biological evolution, but, on the other hand, new institutions, acquiring new appearance, in essence, change superficially, and do not vary. Separate social phenomena, such as war, change only the form, but war always remains war. Human society passed the way from capitalism to socialism in its evolution, but demonstrated that the return movement is feasable. And both the first and the second transition happened for the first time and usually in a revolutionary way.

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