The Economic Theory of Institutional Change (ETIC) and the Emergence of Public Activities

Rosenfeld, Martin Article The Economic Theory of Institutional Change (ETIC) and the Emergence of Public Activities Zeitschrift für Wirtschafts- und Sozialwissenschaften (ZWS) - Vierteljahresschrift der Gesellschaft für Wirtschafts- und Sozialwissenschaften, Verein für Socialpolitik Provided in Cooperation with: Duncker & Humblot, Berlin Suggested Citation: Rosenfeld, Martin (1997) : The Economic Theory of Institutional Change (ETIC) and the Emergence of Public Activities, Zeitschrift für Wirtschafts- und Sozialwissenschaften (ZWS) - Vierteljahresschrift der Gesellschaft für Wirtschafts- und Sozialwissenschaften, Verein für Socialpolitik, ISSN 0342-1783, Duncker & Humblot, Berlin, Vol. 117, Iss. 2, pp. 291-312, https://doi.org/10.3790/schm.117.2.291 This Version is available at: https://hdl.handle.net/10419/291888 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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Sozialwissenschaften (ZWS) 117 (1997), S. 291 - 312 Duncker & Humblot, Berlin The Economic Theory of Institutional Change (ETIC) and the Emergence of Public Activities - The Case of Public Employment Services in Germany -* By Martin Rosenfeld 1. Introduction Following the German economist Adolph Wagner (1835-1917) and his famous "Law of Increasing Extent of Public Activities" (or: "Wagner's Law"),1 the economic studies on the positive explanation of public sector activities have mainly identified the size of public activities with public expenditure levels;2 by doing so, they more or less totally failed to answer the following questions: 1. Why has just the provision of certain goods and services been assigned to the public - rather than to the private - sector?, and 2. Why have just certain organizational arrangements been chosen for the public provision of these goods and services? But without answering these two questions, any attempt to explain the growth and changing structure of the public sector must remain fragmentary. (See Littmann, 1977, 113) A certain level and structure of public expenditures will always only result from a public choice in favour of certain institutions in the sense of public responsibilities and competences, which have the task of securing the public (non-private) provision of certain goods and services, and creating a specific organizational arrangement for this provision. Today, with the modern approach of an Economic Theory of Institutional Change (ETIC),3 which has been influenced, above all, by the work of Douglass C. North, we have an economic theory which tries to explain the emer- * Verantwortlicher Herausgeber / editor in charge: M. R. 1 Or: "Law of Rising Public Expenditures". See Wagner, 1893, 892-915. 2 See e. g. Fehr,1984, especially p. 32. For a summary of some of the more recent economic studies on the growth of public expenditures see Mueller, 1989, 320-347. 3 I. e. the evolutionary version of New Institutional Economics (NIE). ZWS 117 (1997)2 19 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 292 Martin Rosenfeld gence and the change of institutions of all kinds.4 The capacity of this ETIC-approach for an explanation of the institutional bases for today's public activities is the subject of this article: is the ETIC-approach able to answer our two above-mentioned questions? After a short survey on the general structure of the ETIC (section 2.), the article's main section (3.) presents an exemplary application of this approach to explain the historic emergence of the institutions for public activities; as an example for new public activities in general, we will look at the introduction of the institutions for Public Employment (or: Employment- Exchange-) Services (PES) in Germany, in the 1890s. Finally, we will ask for the possible conclusions from this application for a theory of the emergence of the institutions for public activities in general (section 4.). 2. The General Structure of the ETIC-Approach All the recent attempts in the context of New Institutional Economics (NIE)5 for an explanation of the change6 of institutions in the sense of the "formal" institutions (= rules which are written down in constitutions, laws, statutes, or contracts)7 for a national economy may be reduced to the following three basic hypotheses from three different "areas of explanation which are shown in Figure 1 and explained in the following:8 2.1 Explanation Area A ("Change-Inducement Explanations") The first of the three basic hypotheses of the ETIC tries to explain why certain actors (individuals or organizations9) become induced at a certain 4 For the details of this approach see this article's section 2, below. As some of the most important contributions to the ETIC-approach see North and Thomas, 1973, North, 1981, and North, 1990. 5 For a survey on NIE and its various sub-theories see e. g. Schenk, 1992. 6 As the ETIC explanations do not distinguish between the cases of an "emergence" and a "change" of institutions, both cases will be subsumed, in the following, to the term of "institutional change". 7 For the differentiation between "formal" and "informal" institutions see e. g. North, 1990, 4 and 46. 8 For these hypotheses see especially Pejovich, 1972, 313-316, Hesse, 1980, North, 1981, Gafgen, 1983, 34-48, Hesse, 1983, Wallis, 1989, 98-105, and North, 1990, 86-87. As some authors want to emphasize the impact of just certain factors (e. g. transaction costs) on institutional change, which they consider as the most important (or: the most neglected) ones, they often concentrate their research on just one or two of these hypotheses; but a comprehensive explanation of institutional change will always have to take into account all the three "areas of explanation". ZWS 117 (1997)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 The Economic Theory of Institutional Change 293 The specific institutional change IC which has to be explained Explanation area C: Public-choice- explanations lead to a decrease in the statuswhich exceeds they Explanation area B: Individual-choice- explanations Explanation area A: Change-inducement- explanations Figure 1: Synopsis of the Basic Explanations of Institutional Change, as Proposed by the ETIC ZWS 117 (1997)2 19: OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 294 Martin Rosenfeld time to start considerations and developing plans for institutional change: an actor will always start with considerations on the advantages of institutional change, if there has been a significant increase in his costs of the institutional status quo ("status-quo costs")10 and/or a significant decrease in his expected costs of achieving an institutional change ("change costs")11 (basic hypothesis I). The status-quo costs for an actor are all kinds of disadvantages for this actor which are generated by the existing institutions. The change costs include in particular all the compensations or fees which are to be paid to those actors who have the competence to decide on the enforcement of institutional change; these actors will be referred to, in the following, as the "decision-making agents". The forces behind the variations of the status-quo costs and the change costs are always changing "situative factors"12. These are all the existing constraints of economic behaviour: the institutions of an economy, the stocks of theories and ideologies, the price relationships within an economy, the preferences of all the actors of an economy, and the disposable income of these actors; the term "income" is used in its broader economic sense to include such factors as property rights and the power to force other actors to do something ("coercive power"). 2.2 Explanation Area B ("Individual-Choice Explanations") The second basic hypothesis of the ETIC focuses on the reaction of an actor (an individual or organization) to the change inducement: An actor's demand for institutional change depends on his status-quo costs, on the var- 9 In the real world, the relevant demanders for institutional change may be identified regularly as the large organizations within an economy: Political parties, special interest groups, large enterprises, governmental units. See North, 1990, 4-5, 7-8, 99- 100. The behaviour of these organizations has always to be explained by analyzing the individual activities of their members, who act, of course, only in accordance with their own preferences, not in order to achieve the objectives of their organizations. But as this article focusses on the ETIC as an approach to explain new activities of the public organizations (= the governmental units at the national, regional, and local levels of government; in the jargon of Wagner: "Zwangsgemeinwirtschaften" [see Wagner, 1893, 856-869]), we will try to reduce the complexity of possible explanative factors and their interrelations by abstaining (for this article) from an analysis of the internal decision-making processes of all the other large organizations (including the sub-units of the governmental units) within an economy. !0 For this term see e. g. Fürst, 1975, 147. 11 For this term see e. g. Hesse, 1983, 83 and 102-104. 12 For this term in the context of the ETIC see e. g. Gäfgen, 1983, 36. How changing situative factors may lead to increasing status-quo costs (or to decreasing change costs) will be pointed out in detail in subsection 3.1, below, for the case of the introduction of the PES. ZWS 117 (1997)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 The Economic Theory of Institutional Change 295 ious situative factors of the status quo, and on the expected change costs (basic hypothesis II): It seems reasonable to assume that an actor will always search for a plan to achieve that kind of an institutional change ("change plan") which will lead to an expected maximum reduction of his status-quo costs; but this search cannot be carried out without taking into account several of those given situative factors of the status quo, which are hard to be changed immediately13 or which shall be (in the short run) preserved: It is always profitable for an individual or organization to preserve all those situative factors (especially: those institutions) which are necessary for the operation of an organization and/or for securing the private income position of an individual or organization14. In addition, the demanded institutional change will also be influenced by an actor's expected change costs, which depend on the specific contents of his change plan15; an actor will become "change demander" and carry out transactions in order to achieve institutional change only if his change plan promises him a decrease of status-quo costs which exceeds his expected change costs. 2.3 Explanation Area C ("Public-Choice Explanations") The third basic hypothesis of the ETIC is based on the idea that in each economy there is some kind of a political "Market for Institutionsas a place where the demanders of institutional change ("change demanders") may get into contact with other actors, who have the legal right to offer and "sell" changes in the institutional status quo ("change suppliers"J:16 13 Because the expected change costs are much too high. 14 The large organizations within an economy have often developed a kind of "symbiotic relationship" (North) with the existing institutional pattern of the economy. See North, 1990, 7-8 and 99-100. They were established because of this existing institutional pattern, in order to maximize the returns for their members on the basis of just this pattern; thus, the representatives of the large organizations will normally have no intention of changing the basic structure of this pattern, but try to achieve "incremental" institutional changes in order to develop further this existing institutional pattern ("Lock-in Effect" [North]). See North, 1990, 7-8 and 99-100. Consequently, the given basic institutional pattern of each economy will always lead to a specific national "path of institutional change", which will normally not be left by any kind of institutional change (= "Path-Dependence Hypothesis" [North]); see North, 1990, 7-8 and 99-100. 15 Or on the loss of benefits which is to be expected for the decision-making agents in the event that the demanded institutional change (according to a specific change plan) will really take place. 16 The ETIC-explanations in this area have mainly the character of an application of the general Public-Choice explanations of governmental activities on the decisions on economic institutions. See Gafgen, 1983, 43. ZWS 117 (1997)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 296 Martin Rosenfeld Institutional change is always the result of - cost-effective - transactions between change demanders and suppliers on the "Market for Institutions" (basic hypothesis III). According to the ETIC, the transactions on the "Market for Institutions" are affected and directed by numerous situative factors of the status quo, in particular by the existing institutions. These factors may bring about that the change suppliers have a tendency to favour more or less systematically the demand of certain actors (individuals or organizations) and the preservation of certain institutions of the status quo. This may lead to the creation of new instituions which raise the efficiency and/or the private income only for certain actors, while these institutions may be totally inefficient and may bring no progress for the economy as a whole.17 Those actors who have decided - according to their individual choice, as discussed in subsection 2.2 - to become change demanders and to carry out transactions on the "Market for Institutions" (in order to "buy" a certain institutional change) are the relevant initiators of any change in the institutional status quo and may be referred to as "change agents" 18. The changesuppliers are primarily the "decision-making agents" of the public sector organizations,19 who act in order to raise their private income and/or "... to attain the ... prestige and power which come from being in office" (Downs, 1957,28). The compensations or fees which have to be paid (to the decision-making agents) by the change agents for the enforcement of their demanded institutional change have for the change agents the character of "change costs". These compensations will always depend in particular on the demand of those actors who oppose the institutional change in question and are willing to pay for the preservation of the institutional status quo, because of their "status-quo benefits"; these individuals or organizations may be called the "preserve agents". 17 For an illustration of how some of the existing situative factors may have worked in history to influence the introduction of property rights which were inefficient for the economy as a whole see e. g. North, 1981, 148-152. See also this article's subsection 3.4. 18 For the use of this term in the theory of "Planned Organizational Change" see e. g. Dienstbach, 1972, 62-63. ZWS 117 (1997) 2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 The Economic Theory of Institutional Change 297 3. An Application of the ETIC-Approach on the Emergence of Public Employment Services (PES) in Germany 3.1 What has to be Explained To answer the question as to the ETIC-approach has the capacity to explain the historic emergence of institutional arrangements for new public activities, we have to make empirical investigations into the history of today's public activities, in order to identify the relevant change, preserve, and decision-making agents; then we must try to trace back the transactions of these actors to (changes in) the various categories of costs and situative factors, as they have been described in the previous section of this article. In the following, the results of such kind of empirical investigations are presented, which were carried out by the author of this paper for the case of the "Public Employment Services" ("PES") - or: "Public Labour-Ex- change-Agencies" -20 in Germany: The sudden emergence of the institutions for the German21 PES took place, at first, only in about two dozens of larger cities, which will be referred to, in the following, as the "pioneer cities" 22, in the mid 1890s. 3.2 The Inducement for a Change of the Institutional Status quo According to the ETIC-approach, it may be expected that in the early 1890s (just short before the introduction of the PES), a significant increase in the status-quo costs, which were caused by some of the existing institutions, took place for some actors. 19 Also the rivals of the decision-making agents, who are hoping to replace the present decision-making agents (they may be called the "potential decision-making agents"), may try to "sell" future institutional change to the change agents. In an absolutist monarchy, the "king" or the "prince" is the decision-making agent at the national or federal level of government; in a modern representative democracy, the relevant decision-making agents may be identified as the members of the national parliament. 20 The contemporary German term for this public activity is "Öffentliche Arbeitsvermittlung", while in the late 1800s and early 1900s, it was more common to use the term "Öffentlicher Arbeitsnachweis". 21 In the field of the PES, as in other sectors of social policy, Germany was, in the late 19th century, somewhat like the "pioneer economy". For the state of nonpublic Labour-Exchange Agencies in other economies in the 1890s see Reitzenstein, 1897, 17-41, 227-247, 274-289. The rise of the PES in the United States is described by Atkinson, Odencrantz, andDeming, 1972, 19-37. 22 Up to the end of World War I, the new institutions of the PES were gradually adopted by more or less all German municipalities; see for this dissemination process in the area of the PES e. g. Uhlig, 1970, 100-101,120-135; Eaust, 1986, 292-293. ZWS 117 (1997) 2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 298 Martin Rosenfeld The empirical evidence shows, that by far the most important change agents for the introduction of the PES were the local authorities ("Stadtverwaltungen"), the executive at the local level of government, which had expressed their demand for PES institutions since about 1890; therefore, we will restrict the following explanation of the change inducement (3.2) and the individual choice of a change plan (3.3) to this group of actors. As has been indicated in subsection 2.1 above, an increase in the statusquo costs (as a change-inducement) for certain actors may always be explained with (changes in) the various situative factors. Figure 2 gives an overview on those situative factors, which played a major role for the introduction of the PES and will be explained in the following. There is one group of situative factors which has probably always a special importance for the change inducement: The "preceding institutions" of the newly emerged institutions , i. e. in this case the institutions for the nonpublic job (and labour) -search-activities, which were in use before the introduction of the PES in the mid 1890s:23 Up to this time, the institutional status quo in the field of job-(and labour) -search-activities was by far dominated by the workers' traditional custom (as an "informal" institution [= a rule which is not written down in constitutions, laws, statutes, or contracts] of individual self-search actitivities) of "Looking-Around" ("Umschau") for jobs, i. e. "travelling" or "wandering" from place to place, and from factory to factory, asking potential employers for job opportunités.24 Among the "formal" institutions, those for the provision of employment services by private "Profit-motivated Employment Agencies " ("PEAs") had the greatest importance.25 Further "formal" preceding-institutions of the 23 It is to be noted that with the introduction of the PES in the mid 1890s, the nonpublic job (and labour) -search-activities were not stopped. The PES and the nonpublic job (and labour) -search-activities existed in Germany side by side for more than two decades, although, with the introduction of the PES in the mid 1890s, it was intended by the relevant change agents to replace the private job (and labour) - search-activities by the PES; but this goal was not achieved prior to World War I. During and soon after World War I, the majority of the Charitable Employment Agencies, the Union Employment Agencies, and the Employer's Employment Agencies had been closed, see e. g. Thiemann, 1925, 52. The Profit-motivated Employment Agencies were prohibited by the German "Arbeitsnachweisgesetz" (§ 48) in 1922. It should also be noted that even before the mid 1890s, there had been already several experiments by local welfare-departments with some kind of public employment services for welfare recipients only. See for these experiments of the local welfare departments e. g. Reitzenstein, 1887, 4-6 and 46-47. These experiments were operated at a very small scale (by the local welfare officials) and caused quite similar status-quo costs for the relevant change agents as the emplyoment agencies of the private charities. It is for these reasons that, in this article, we will leave the "Local Welfare Employment Services" out of consideration. 24 For more details see e. g. Reitzenstein, 1897, 51-52. 25 For the central features of the PEAs see e. g. Conrad, 1904,150-165. ZWS 117 (1997)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 The Economic Theory of Institutional Change 305 the primary purpose of employment exchanges (and led to an increase in the number of the unemployed). As the Union Employment Agencies, the Employers' Employment Agencies, and the Charitable Employment Agencies served (or: were regarded) as instruments in favour of the supply or the demand side of the labour market,45 many employers or jobsearchers rejected the use of these agencies. It is for these reasons that it was probably expected that a "neutral" and "impartial" PES would attract much more customers than all the private employment agencies together, drive them more and more out of the market for employment services, reduce the job-search by the custom of "Looking-Around", increase the chance to fill the "right job" with the "right person", and reduce the number of the unemployed significantly. - The institution of free-of-charge delivery of the PES should probably support these tendencies by allowing the PES to drive those of the nonpublic employment-agencies out of the market, (See e. g. Jastrow, 1902, 153) which were not free of charge46. There would have been one major other possible institutional choice for the local authorities to reach some of these results (in order to reduce the various status-quo costs which were caused by the preceding institutions of the PES institutions): The introduction of public regulations for the nonpublic employment agencies for prohibiting some of their cost-effective activities. But such regulations could never have created something like a "centralized" and "general" employment agency. And one of the "constant" situative factors, the given allocation of competences between the various levels of government, did not allow the municipalities to introduce such regulations (as a "repressive" public activity)47; thus, the given allocation of competences probably influenced the choice of the local authorities in favour of the PES (as a "supporting" public activity). 3.4 Transactions on the "Market for Institutions" for Achieving Institutional Change We have to complete our explanation of the emergence of the PES in this subsection by looking at how the local authorities succeeded in getting approval for their individual change plan (the introduction of the PES) by the relevant decision-making agents (the suppliers of institutional change): 45 See above, footnote 29. 46 For those employment agencies which were not free of charge see e. g. Conrad, 1904,61,137,155,168-169. 47 Only the federal level of government would have had the competences for such regulations, as for the trading-regulation laws ("Gewerbeordnung") in general. ZWS 117 (1997)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 306 Martin Rosenfeld For the historical situation of the German municipalities in the late 19th century, the decision-making agents may be identified as the members of the local councils (= local councillors or local parliamentarians), who were, according to the pre-World War I electoral laws, in the main representatives or "agents" of the property-owning bourgeoisie, and tended to be in favour of the political demands of the local employers and the employers' federations (See e. g. Jastrow, 1902, 139-140; Uhlig, 1970, 97). Therefore, and as the institutional status quo in the field of job (and labour) -search-activities produced considerable status-quo benefits for the local employers,48 the local councillors had to reject the local authorities' demand for the PES and acted as "preserve agents" (See e. g. Uhlig, 1970, 101-102, 129-133). If there had been more democratic electoral institutions in pre-World War I Germany, the local authorities would have probably had no difficulties in achieving the demanded institutional change, because the employees and the trade unions, and probably the great majority of the voters, were in general in favour of the PES-plan;49 this illustrates the effects of a given political constitution on delaying the institutional change50. But also in the real world of the 1890s, the decision-making agents in the "pioneer cities" gave up their resistance to the PES after several months or even years and agreed to the change plan of the local authorities (See e. g. Uhlig, 1970, 101-102, 129-133). For an explanation of how this could happen, we may refer to the following two basic strategies which may be used by a change agent in order to "buy" (and achieve) institutional change:51 48 Particularly the Employers' Employment Agencies contributed to these statusquo benefits, because they served as instruments for industrial actions and for the purge of the labour force from persons reluctant to work, from persons who had broken their employment contracts, and from members of the labour movement. See e. g. Conrad, 1904, 57-58; Keßler, 1911, 131. During World War I, the status-quo benefits which were caused by the Employers' Employment Agencies dropped dramatically, because of the surplus demand on the labour market; this - among other factors - allowed the change agents in the field of Employment Services to disseminate the new institutions of the PES to more or less all German municipalities by the end of World War! 49 Although some of the local trade unions resisted at first against the PES, they changed their mind during the next couple of years and turned to support the change plan of the local authorities. See for the position of the trade unions: Faust, 1986, 80- 86. 50 The influence of changes in the allocation of the political decision rules on the growth of government in general has been stressed especially by Timm, 1961, 226- 227,232,234. 51 The following arguments are based on the assumption that the decision-making agents have all the information they need about how the change plan would affect their individual cost-benefit calculations. Otherwise, it would be a possible third strategy for the change agents to "persuade" the decision-making agents (by supplying them with relevant information) that the demanded institutional change would prove profitable for them. ZWS 117 (1997)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 The Economic Theory of Institutional Change 307 (1) Playing for time, i. e. waiting for decreasing change costs (= the costs of compensating the decision-making agents for their consent to the demanded institutional change); such a decrease will take place especially in connection with fundamental constitutional changes (e. g. in the sense of the introduction of a more democratic electoral system, as compared with the status quo). (2) Making some kind of payment (compensation) in exchange for the demanded consent ("Exchange Transactions"). In connection with this strategy, the decision-making agents will always have to explain their change of mind to their electors; thus, those actors who are able to supply the decision-making agents with theories which are suitable for such justifications will have a greater chance of getting what they want. (See e. g. Hesse, 1983, 104) As there is no evidence for a decrease in the change costs for the local authorities in the early 1890s, the local authorities must have turned to strategy (2). The possibility of achieving a demanded institutional change by this strategy will always increase, if - the change agents have property rights of some relevant resources for compensating the decision-making agents, and if - it is possible to construct strong theoretical connections between the demanded institutional change and increasing individual benefits for the electors (or: "principals") of the decision-making agents. In the 1890s, in the case of the PES, the historical evidence met both conditions: (I) Under the pre-democratic German constitution of the late 19th century, the local authorities had a position which was to some extent independent of the local councillors;52 this gave them probably the opportunity for some kind of "log-rolling" with the decision-making agents: The local authorities may have threaten, e. g., to block some decisions of the local councillors, if the decision-making agents were not willing to support the introduction of the PES. (II) The PES could be interpreted as an instrument to create new benefits for the local employers, because an increase in local employment was expected to secure the income for the landlords53 and to bring about a higher quality of the local labour force (as unemployment goes always along with a reduction of personal skill, knowledge, and discipline)54. In addition, the 52 See for the position of the mayors in the late 19th century e. g. in Hesse: Reh, 1922, 308; in Prussia: Riess, 1924, 56-59; in Württemberg: Ruck, 1922, 295. 53 See for this argument: Zahnbrecher, 1914,142. 54 See for this argument: Conrad, 1904, 252. ZWS 117 (1997) 2 20 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 308 Martin Rosenfeld expected results of the PES in the sense of decreasing costs of public welfare, local police, and the local trade courts55 could easily be described as benefits for the tax-payers and voters of the decision-making agents. Our empirical knowledge about which kind of Exchange Transactions took place in the real world of the 1890s is still very limited, so far; there are only a few descriptions of the political bargaining processes on the PES in the pioneer cities. These sources provide a lot of clues for the local authorities' attempt to supply the decision-making agents with theories which were suitable for them to justifying their change of mind (the support of the PES) to their electors, as described under (II), above. This empirical evidence may indicate that there had really been some kind of "payment" of the local authorities to the decision-making agents, as a compensation for their support of the PES, although the empirical sources include no definite clues for such a compensation. An explanation for this lack of empirical evidences could simply be that the "payment" on the "Market for Institutions" may often take place in secret, without any kind of written documents or "contracts". 4. Conclusions As has been illustrated with our exemplary analysis of the PES, the ETIC-approach avoids any kind of a monocausal explanation of institutional change and tries to bring out the various interrelations (and their specific "anatomy") between a lot of explanative factors. But as there seems to be no possibility for "weighting" all these factors against each other, in order to select the "more important factors" from the "less important" ones, it is more or less impossible to find out which factors have been - and perhaps: will be - the very "dominant" forces behind the growth and the changing structure of the public sector as a whole. Another problem of the ETIC is the asymmetry between the possibilities for empirical investigations for the two areas of the change-inducement explanations and the individual-choice explanations on the one hand, and the area of the public-choice explanations on the other hand. As to the first two areas, the empirical investigations may often be done with the study of various kinds of documents, written statements, articles in newspapers and journals, etc. But the possibility for isolating the relevant determining factors within the third area, the public-choice explanations, will probably always be limited. 55 For these benefits see subsection 3.3, above. ZWS 117 (1997) 2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 The Economic Theory of Institutional Change 309 These results suggest that even with many future empirical studies into the emergence of public goods and services, based on the theoretical framework of the ETIC, there is probably no great chance for elaborating something like a "general" economic theory of public activities and their evolution. But this does not mean that the ETIC brings no kind of progress for the economic analysis of public sector change: Our application of the ETIC to the "birth" of the German PES has shown that the ETIC-approach has not only the advantage of a great capacity for integrating various rather different determinants of public activities in just one theoretical framework, but also the ability to serve us as a very productive method for detecting some relevant determinants of public activities which have been so far under-esti- mated by the traditional economic analysis of public sector growth : This may especially be supposed for two of those determinants which have probably influenced the emergence of the PES, the "disposable income" of the public sector and the status-quo institutions in the sense of the existing public responsibilities for public goods and services: (A) In the traditional economic analysis of public sector growth, it has been proposed by many authors that the situative factor "private income" and its increase has been of special importance for the long term evolution of the public sector. (See e. g. Timm, 1961, 231) The study of the PES suggests that for the introduction of public responsibilities for new public goods and services, another "income" category is of the greatest importance: The situative factor "disposable public income" and its significant decline have probably been (and will be) some of the central causes for the representatives of the public sector to become change agents.56 (B) The traditional economic analysis of public sector growth has put much more stress on the impact of changing situative factors for increasing public expenditures than on the impact of - in the short run - "constant" situative factors', our analysis of the PES has shown that changing situative factors may do their "work" always only in combination with "constant" situative factors. In particular, with our analysis of the PES, the "constant" situative factor "existing public responsibilities for the provision of public goods and services " has been isolated as one of those factors which may be in general very crucial for the introduction of the institutions for new public activities:57 The demand of the representatives of public organizations for 56 It was the significant decline of the "disposable local income" in the early 1890s hat led the local authorities to demand an institutional change (= the introduction of the PES). 57 In the case of the PES, the public responsibilities for public welfare, the local police forces, and the local trade courts caused (in combination with the decrease in ZWS 117 (1997) 2 20' OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 310 Martin Rosenfeld new institutions has probably very often the task to securing or improving the provision of the existing public goods and services. 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ZWS 117 (1997) 2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22 312 Martin Rosenfeld Zusammenfassung In der ökonomischen Analyse des "Wachstums der Staatstätigkeit" fehlt es noch immer an einer geschlossenen Erklärung der Neuentstehung öffentlicher Aktivitäten. Der Beitrag untersucht, welche Möglichkeiten die "Ökonomische Theorie des Institutionellen Wandels" ("ÖTIW") hierfür bietet, und zwar am Beispiel der Einführung der "Öffentlichen Arbeitsvermittlung" als einer neuen kommunalen Aufgabe in den 1890er Jahren. Es wird gezeigt, daß die ÖTIW vor allem durch ihre besondere Fähigkeit zur systematischen Erfassung von höchst heterogenen Erklärungsfaktoren und zur Entdeckung von "neuartigen" Erklärungsfaktoren, die in der bisherigen Diskussion über das "Wachstum der Staatstätigkeit" vernachlässigt wurden, zu einer allgemeinen Theorie der Evolution öffentlicher Aufgaben beitragen kann. Abstract Up to now, in the economic analysis of public sector growth, we are missing a comprehensive explanation of the emergence of new public activities. The article reports on an exemplary attempt to explain the emergence of public activities with the Economic Theory of Institutional Change (ETIC). It is shown that the ETIC-approach has the capacity for integrating various rather different determinants of new public activities in just one theoretical framework. Another advantage of the ETIC is its capacity for detecting some relevant determinants of public sector change which have been so far under-estimated by the economic analysis of public sector growth. JEL-Klassifikation: H11 und H 42 ZWS 117 (1997)2 OPEN ACCESS | Licensed under CC BY 4.0 | https://creativecommons.org/about/cclicenses/ DOI https://doi.org/10.3790/schm.117.2.291 | Generated on 2023-04-04 12:23:22