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AUTHOR: Regine Heidenreich TITLE: Economics and Institutions: The Socioeconomic Approach of K.

William Kapp

SOURCE: Journal of Economic Issues 32 no4 965-84 D '98

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Most of the existing reviews of K. William Kapp's concept of social costs and his critique of economic theory originate in the seventies and eighties when Kapp was rediscovered as one of the founders of environmental policy. A review of his works pertaining to his theoretical approach to institutional economics is lacking, however. The main purpose of this survey is to trace the key concepts of Kapp's theoretical approach and to show how that approach was influenced by cultural anthropology, social psychology, and sociology. Kapp's revision of economics and economic policy is based on a philosophy of science often neglected in the discussion about his concept of social costs, and his contribution to institutional theory goes beyond a theoretical foundation of the concept of social costs. First, I present a review of the core ideas of Kapp's institutional theory. The reconstruction of Kapp's socioeconomic approach concentrates on both published and unpublished works and correspondence.(FN1) Focusing on the lifework of Kapp, I show that the older or historical institutionalism in the tradition of Thorstein Veblen, Gunnar Myrdal, Adolph Lowe, and Kapp has a theoretical framework based on a model of social action. Commonalities have not yet been recognized. This leads to a different concept of rationality and to a search for alternative institutional arrangements capable of producing social welfare. It will be shown how Kapp's institutional approach to economics therefore bears important implications for economic policy and welfare analysis. In keeping with the tradition of the American (Veblen, Commons) and European institutionalism (Myrdal, Lowe, Perroux), Kapp believed the economy to be embedded in cultural practice. Economic action thus forms part of an extensive social context. Economic development is an ongoing cultural process in a changing world. Institutions, as Kapp defines them in an unpublished manuscript,(FN2) are habitual patterns of thought and action, engendered by social arrangements. Economic evolution is linked to the institutional structure. In this process, the adjustment of institutions alternates between ceremonial patterned behavior and progressive institutional change. This is a nonteleological approach since the final form is not given. Throughout his works, Kapp insisted on a historical and empirical approach to an integrated social inquiry [Kapp 1957]. This perspective is related to time and space and thus incorporates social and cultural features. The institutional economics of K. W.

Kapp lies at the point of intersection of economic theory, cultural anthropology, and modernization theory.(FN3) In both a biographical and theoretical sense, Kapp is an important mediator between American and European institutionalism. A scholarship from the Institute of Social Research--the Frankfurt School of Critical Theory in exile, situated at the New School for Social Research--enabled Kapp to establish himself in the United States. Coming via Geneva to New York as a refugee from Nazi Germany, he became familiar with the philosophy of science of Charles S. Peirce, William James, and their successors. Compared to Kapp's European background, American social philosophy, Dewey's pragmatism and its further development, and symbolic interactionism provided a distinctive perspective on economics. "American and European institutionalism," says Kapp [1968b, 1], "... look at the dehumanization of our economic thinking as the result of isolating so-called pure economic phenomena from their social context--an isolation that stands in contradiction to the epistemological demands, for instance, of contextualism as propounded by John Dewey." The perception of the social world, of institutions, and of objective and symbolic power is part of the pragmatic approach. Peirce's theory of signs made it clear that raw sense data are to be interpreted by signs, by symbolic representations, or by patterns [Peirce 1967, 1970; Liebhafsky 1993]. Kapp's theoretical approach for institutional economics combined American pragmatist social philosophy and European institutionalism. This quest for synthesis is best reflected in the unfinished and unpublished manuscript The Foundation of Institutional Economics. The pragmatic perspective provides a conceptual model of social action different from that of the utilitarian philosophy. Kapp's basic model of action is derived from the "behavioral sciences": social psychology, sociology, and cultural anthropology [Kapp 1954]. Thus, economic action emerges between interdependent social actors. This paradigmatic core has implications for Kapp's epistemology and therefore for the understanding of institutional economics. THE SOCIAL CONSTRUCTION OF INSTITUTIONS AND EXTERNALITIES In the constructivist approach found in Kapp's institutional economics,(FN4) talking about economies involves speaking of social constructs, or, to be more precise, of processes of social construction. Thus, constructivism denotes the analsysis of the cultural construction of the norms and preference structures that motivate social action within the context of structured institutions. As an alternative to the steady-state concept, institutional theory has at its core the principle of cumulative causation and circular interdependence [Kapp 1968a, 8f.].(FN5) This dynamic approach is open to the impact of power on allocation. In The Foundations of Institutional Economics, Kapp reflects on power in the sense of (unequal) bargaining power due to size, organization, and skills: the domination effect [1969, chap. 9]. Furthermore, power can be a legal situation, for example, the exercise of ownership rights. In more general terms, power can be identified as the capacity to influence the outcome of a social process in a direction that corresponds to one's own aims and objectives. Nevertheless, power, while often related to institutionalized ownership rights, is not exclusively confined to the result of such rights. The social processes underlying the definition of welfare, utility, and costs involve power in a broader sense. In definitional processes, power manifests as domination and as opportunities and capabilities (e.g., articulation, enforcement, etc.). Consequently, power is a general component of social interaction. Kapp mainly refers to power and coercion in the sense of structural power or the capacity to

enforce social priorities, not in the sense of personified domination [Kapp 1978, 294; 1969, chap. 6]. In any case, in speaking of aims such as efficiency, equity, or cost containment, policy analysis has to explain (or legitimize) its social relevance. Communication on policy outcomes, substantial values, and minimum standards is within the realm of social economics. Kapp's [1987, 208] institutional approach aims toward the construction of pragmatic criteria for substantial rationality and social choice: social indicators and critical values, as well as an institutionalized framework of socioeconomic and legal relations, to provide environmental control. Kapp's concept of social costs has wider implications for his institutional approach to economics. A core element of his institutional theory of economics is the analysis of externalities that might induce institutional and social change. Externalities--Kapp prefers the notion of social costs--are the consequences of social interaction: they are non-market interdependencies. Institutional change actually generates externalities. Thus, changes in the institutional structure are particularly significant for the analysis of social costs. This concept goes beyond Coase's [1960] understanding of the notion of social costs as external to the decision-making unit. In an institutional perspective, externalities are selected in a social process of evaluation. They are the result of interdependent human action. Social costs become relevant in a realm of socially integrated actors, their cognitions, and social preferences. Thus, the social recognition and evaluation of externalities form part of the field of economics as a social science [Kapp 1978, 41]. Externalities as non-market phenomena, as ubiquitous results of interdependent interaction, have to become socially recognized. The societal evaluation of externalities as social costs is related to the social context, interest groups, experts, etc. [Kapp 1978, 293, 297]. Social costs may lead to a call for public policy and may even initiate institutional changes. Thus, the perception of social costs affects social welfare. FOUNDATIONS: MICRO-, MESO-, AND MACRO-LEVEL Individual actors are embedded in social interaction (networks, social configurations). Interdependencies are cognitively founded and filtered. In Kapp's view [1954], embeddedness is a core element in cultural anthropology and social economics. Sociologically speaking, embeddedness emerges as networks. The interdependencies between the elements of the network do not have to be strategic as within rational choice. The institutional notion of embeddedness is a non-dualistic one:(FN6) the relational (social) position of a person let into a network is cognitively mediated and has an influence on the perceptions and, for example, ideas of utility [Kapp 1954, 220]. In the United States, Kapp became very interested in social psychology. Kapp's perspective is in large part consistent with constructivism and cognitive science. The human capacity for cognitive construction develops in social interdependencies (networks). The social psychology of George H. Mead [1967]--his work on the reciprocity of perspectives in children's games, the taking-over of social roles, and so on--led to the foundations of the micro-level in institutionalist theory. In particular, Mead's concept of role-taking and his theory of actor-identity, connecting social interaction and individual selfreflection, became important for the concept of institutions. Aims and means and action and goals interrelate. They develop within the contexts of action. Rational action is a logical reconstruction of generalized rules. Action in institutional perspective is intentional in nature [Kapp 1954]. The interpretation of economic behavior is not centered on the modeling of rational choice, but on the interpretation of social action (group decisions, consumer behavior,

behavior of workers and unions, entrepreneurial behavior). Furthermore, the concept of the "'self' and the 'social self' with its emphasis on the internalization of social norms and social value-orientations and their organizing functions; status, position and roles, common perception and common expectancies and self-reinforcing attitudes in response to common situations" [Kapp 1954, 219] became important for Kapp's understanding of the nature of preferences and identities. In the perspective of the "old" or "critical" institutionalism in the VeblenMyrdal-Kapp tradition, the culturalist approach offers an alternative concept of needs. The notion of needs as a result of enculturation replaces the assumption of given preferences. Preferences are considered reciprocal and normative orientations, acquired and internalized by interactive processes. Thus, the micro-dimension in Kapp's institutional approach is an interactionist perspective. Individual action is embedded in social, economic, and political structures and forms part of the field of a given culture. On the micro-level, this forms the cognitions and the creative and motivational capabilities of actors. (FN7) The individual is considered to be a multiple set of selves, roles, and motivations, accordingly. The philosophy of pragmatism and the development of social philosophy and psychology therefore became important for the micro-foundation of Kapp's institutional economics. Symbolic interactionism provides a model of social action that is non-Cartesian. It does not reproduce the dichotomy between "I" and "me," individual and society, preferences and constraints. It provides a theory of social action and a social anthropology grounded in communicationbased sociability. Social action is a process of reciprocal interaction, of internalization and habitualization, mediated by symbols. Patterns of reciprocal expectations emerge between individuals. These patterns are open in the sense of an exchange of, and establishment of, definitions of reality. The anthropological foundation of institutional theory implies individuals acting within a cultural context in the sense of collective knowledge [Benedict 1946, in Kapp 1961]. This leads to a social notion of action and reality at the core of institutional theory. A multidimensional understanding of social action settles economic action in the matrix of cultural processes and involves multiple meanings and outcomes. Culture constrains the range of actions individuals are likely to consider in pursuit of their objectives. Multiple and overlapping meanings of actions and institutions promote unexpected novelty and the emergence of new ideas and artifacts in the cultural matrix. Institutions, as habitualized patterns of social action and perception and as social rules, form patterns of individual and social action; they constitute social order [Kapp 1969]. The relation to the pragmatic approach is obvious: proving the consequences of an action, a scientific statement, or a value judgment means contextualization of the effects [Kapp 1969; Joas 1992]. It is an interpretative approach, based on understanding (verstehen). Kapp's institutional theory links the pragmatic approach to the idea of a social discourse that generates ideas on social welfare and on the exclusion and inclusion of social groups. Models of desired social integration take shape through a socio-political process. On a meso-level, institutions cannot be understood merely as external restrictions on rational individual actions. There is a reciprocal interdependence between institutions and individuals in which actors shape institutions and are themselves reshaped by institutions. Institutions form actors' identities and preferences. Processes of preference building are not stable against alternative outcomes. Institutions, as habitualized patterns of perception and action--as

"cumulative sequence of habituation" in Veblen's words--have an impact on preferences and habits. We rely upon routines and habits in a dual manner: habits both forming and being formed by social institutions [Veblen 1961, 241]. Thus, institutional and life-world aspects and orientations of human action become part of the analysis; they are not selection filters or restrictions on human action, but appear as structuring patterns, dependent on time and space. On the mesodimension, these institutions attain relative stability [Kapp 1968a, 2]. They mediate between individual action and social structure. Thus, economic action as social action is embedded in the social and cultural context. In the introduction to his manuscript on institutional economics, Kapp [1969] states that institutional arrangements, derived habits, attitudes, and valuations bear their own logic and dynamics. Institutions are a strategic factor in

the analysis of processes of production and distribution as well as with respect to the study of long-term development processes .
On a macro-level, this has implications for allocation theory: social preferences are part of stated allocation optima. Social welfare has to be constituted in a social discourse and not by aggregating individual preferences on welfare. Therefore, the concept of efficiency is reformulated. Semantically, it is an open concept that concerns aims and means. The institutionalist paradigm integrates the premises of economic action, formulating issues and aims and generating preferences of private and social issues. But social efficiency is not defined in a normativist or decisionist way. Production, distribution, and consumption are considered as a network of social relations, embedded within a cultural matrix. Thus, the allocation of resources is loaded with social meaning that might be reconstructed in the scientific process. In contrast to the comparative-static approach, institutional theory stresses the analysis of cumulative effects and circular dynamics: socioeconomic transformation consists of cumulative processes with emergent features. In his unpublished papers, Kapp [1969] develops the following definition: "Institutional Economics is not simply concerned with the economic and social impact of institutions and technology, but it must be understood as a form of economic analysis, guided by the perspective of a social structure in transformation." Favoring the term "evolutionary economics" to "institutional economics," Kapp [1968a, 1] stresses that evolutionary economics is "concerned above all with the dynamic character of economic processes and systems including problems of economic development and underdevelopment." We may summarize Kapp's works by saying that he points out the differences in the micro-foundation between institutional and neoclassical economics and explains the implications for the macro-dimension if there is a mediating level such as institutions. Economic action in institutional theory is institutionalized action. This leads to a culturalist perspective: "Social economics views the economy as an open system which is embedded in a socio-cultural matrix of which it is part and from which it receives its structural and organizing principles as well as a variety of 'disturbing' impulses" [Kapp 1965a, 1]. Culture, in the words of Kroeber and Kluckhohn [1952, 211; see Kapp 1961, 160 ff.], "is not merely a 'tissue of externalities'." Culture constitutes social action, social institutions, and cognitions. Analyzing the impact of cognitive processes on the formulation of social preferences forms part of Kapp's institutional approach. Moreover, Kapp [1983, 236] mentions the continental European tradition of socioeconomics formed by Paul Tillich, E. Egner, and Karl Polanyi, for they recognized the importance of cognitions for the understanding of social action.

What does the cultural approach in Kapp's work really mean? Is it the application of social anthropology to economics or just a different microfoundation? Is it replacing economics by social philosophy? K. WILLIAM KAPP'S CULTURAL APPROACH AND ITS FURTHER DEVELOPMENT Culture is a result of the social interaction of individuals. The notion of culture combines ideal and material standards. The ideal level refers to any symbolic expression that conveys meaning and identity. It comprises elements to express meaning (symbolic means) and structural patterns that organize these elements into a coherent whole. Kapp [1954, 215] refers to both material and symbolic culture: "man-made techniques and tools, the symbolic universe as well as the ideas, attitudes, customs and the corresponding behavior patterns of a society." We can identify areas of symbolic order with a specific logic. Institutional theory aims at applying the cultural approach of anthropology to economy and society [Dowling 1982]. A culturalanthropological approach to understanding human action replaces the utilitarian philosophy as basic foundation of neoclassical theory. Furthermore, the inherent psychology of cognition leads to a constructive understanding of economic action as social action.(FN8) Economic action forms part of "the context of changing human (i.e. socio-cultural) relations" [Kapp 1978, 288]. Thus, the acceptance of socio-cultural a priori, as well as an understanding of socialization as enculturation process, results in replacement of the utilitarian centered "homo oeconomicus" with "homo culturalis" or "homo institutionalis" [Kapp 1969]. Kapp often refers to the evolutionary economics of Thorstein B. Veblen [1961, 173]. Veblen introduced the cultural approach to evolutionary economics when he defined evolutionary economics as "inquiry into cultural or institutional development as effected by economic exigencies," thus analyzing interdependencies between institutions and technology that were previously conceived as an unbalanced process of adaptation.(FN9) Nevertheless, within the development of cultural anthropology, Veblen's behaviorism and cultural selectivism became critically revised. In Hindu Culture, Economic Development and Economic Planning in India [1963], Kapp applies Veblen's evolutionary approach in a less rigid way. He assumes that economic problems can only be understood in the context of the culture in which they occur. Kapp exemplifies his awareness of the importance of culture, for example, in the analysis of time structures that shape preferences and institutions--the Hindu idea of cosmological time versus the Western concept of linear time. Economic theory comprehends culture as a result of individual choices. Institutional theory, however, differentiates between the specific logic of the economic and cultural field. Kapp's understanding of social choice processes also entails the perception and evaluation of externalities. These may consist of external effects and other social interdependencies, for example, preferences on social relations (e.g., equality of income distribution). Their relevance is constructed in a social discourse [Kapp 1978, 281 ff.]. The extent and intensity of social costs depend on the range and depth of the social configuration. Even the perception and the relevance of social costs depend on the nature and quality of the social configuration. Thus, the validation of externalities is culturally dependent. Kapp adapted the culturalist framework to the analysis of ecological disruption and other social costs [e.g., Kapp 1970]. Cultures develop their own original means of meeting basic needs. Hence, other major fields of investigation are Kapp's critique of economic rationality

and his anticipation of the basic needs approach. Human needs are a product of a complex process of enculturation.(FN10) They are indicators of substantive rationality in the sense of Max Weber and Otto Neurath [Kapp 1965a, 1968a]. Kapp's critique of the concept of rationality in economic theory was influenced by the critical theory of the Frankfurt School (Horkheimer, Adorno, Habermas). (FN11) The concept of substantial or, in Kapp's diction, "substantive" rationality is linked to a theory of human needs. The process of enculturation connects micro- and macro-levels. Culturally sanctioned patterns of behavior are conveyed in this process that creates relative stability and integration. Depending on culture, mode of production, and institutions, a dominating social character, or habitus, emerges. This does not mean cultural determinism or the fiction of social stabilization and integration [Kapp 1976, 178]. The process of enculturation leaves space for autonomy and difference--the person is not an object of culture, but is capable of creating his or her own environment. There is a hidden tension between the internalization of central elements of culture and the specific openness of human beings and their ability to create new forms of action. Kapp's [1950] concept of enculturation relates to the social psychology of the Frankfurt School. Furthermore, he [1950, 1957] refers to the psychotherapists Erich Fromm, Karen Horney, and R.O. Sullivan a number of times. Hodgson [1988, 118] calls this perspective "the concept-forming framework of institutions and culture." This idea is not deterministic, but rather open and ambiguous. Social interaction and habits develop or become stabilized in this process of perception and action. These institutions and the structure of a society reflect in social patterns of perception and meaning. SOCIAL COSTS AND SOCIAL WELFARE With regard to the study of pre-industrial economies and the emergence of social costs in market capitalism, the influence of Karl Polanyi [1957a, 1957b] on Kapp is striking [Kapp 1978, 288; 1954, 209; 1950, 708; Swaney and Evers 1989]. Polanyi criticized an economistic perspective on society and denounced the concept of a self-regulating market economy as being dangerously utopian and threatening because of its negative impact on social cohesion. In a letter to Polanyi dated February 2, 1956 [Kapp archives, Basle], Kapp writes: "Again, as I indicated in our previous discussion, I feel that there is no fundamental gap between your position and mine.... I am looking for a broader conceptual framework based upon a theory of man and culture, in terms of which it will be possible to study the structure and function of the economy as a component part of society and thus to make intelligible what seem to be now only disparate empirical data." Polanyi [1957a] developed a differentiation of types of society by distribution: reciprocity, exchange, and redistribution. In his most important book, The Great Transformation, he analyzed the passage from an integrated agrarian society, where the economic interactions of the actors were embedded in an integrating cultural framework, to the independence of the economic sphere in modern market societies. Disembedded, or uninstituted, market economies produce disturbances and destruction. The notion of social costs relates to the emergence of the generalized market in the process of industrialization. The social costs resulting from the development of selfregulating markets emerge in the process of the subjection of nature and work to market mechanisms. In The Great Transformation Polanyi mentions the social dislocations that result from the movement of the enclosures as "unregulated economic improvement" [Polanyi 1957b, 34 ff.]: devastation of

villages and towns, decimation of the rural population, peasant rebellions, and an aggravating situation of the dispossessed, shortages in local food provisions, and unemployment. Thus, the ground was prepared for the Industrial Revolution, characterized by "a transformation ... of the natural and human substance of society into commodities" [1957b, 42]. Polanyi widens the scope of economic history for the perception of interdependencies of capitalism and precapitalism. The emergence of non-simultaneous modes of production and regulation became important for Kapp's approach to the socioeconomics of developing countries. The transformation of economies produces social costs that contain socio-cultural and psychological externalities as well as other indirect interdependencies [Kapp 1978, 281 ff.]. Different institutional orders produce different patterns of economic motivation, differing from society to society or even within societies. Let us, for example, consider the intermingling of traditional, Fordist, and Post-Fordist modes of production and the depending motivations. Polanyi [1957b] describes some of these non-simultaneous development processes [Kapp 1954, 207]. In his analysis of the private enterprise, Kapp points out that friction among firms, markets, and networks produces social costs. Social costs have to be socially qualified before they can--as externalities--become subject to internalizing strategies in the Pigou-Coase tradition. Thus, Kapp's theoretical and empirical analysis of the social costs of free market policies transcends the notion of negative external effects of production and consumption in the neoclassical approach. The reconstruction of Kapp's works shows that social choice processes consist of perceiving and valuing externalities (external effects and other social interdependencies, such as preferences on social relations) as well as in constructing their relevance in a social discourse.


Kapp's interest in the deterioration of the ecological and social environment and in economics from a cultural perspective led him to research the problems of development in "Third World" countries. (FN12) In the 1960s, he developed, in the context of modernization theory, his institutional approach in the economics of development. He focused on the interdependencies of the Hindu social system and Hindu attitudes and on their values and religious orientations and hence behavior patterns. Traditional pre-industrial arrangements, he showed, could function as blockades to modernization and economic growth. Kapp consolidated his approach to socioeconomic and environmental development until his sudden death in 1976. He conducted several case studies including ones on China and Bangladesh [Kapp 1974, 1975]. Social costs play an important role in development processes. Kapp's works on social costs in developing economies centered on the following issues: soil depletion and erosion, air and water pollution, urban agglomeration, industrial accidents, and occupational diseases. Due to their cumulative character, the economy as a social system does not move toward a new equilibrium, but tends to become even more destabilized: "The principle of cumulative or circular causation stresses the fact that social processes are marked by the interaction of several variables, both 'economic' and 'non-economic', which in their combined effects move the system away from a position of balance or equilibrium. In fact, instead of calling forth a tendency toward automatic selfstabilization, social processes may be said to be subject to a kind of social

inertia which tends to move the system in the same direction as the initial impulse."(FN13) Therefore, social costs of development are "essentially non- or extra-market phenomena. They arise as a result of physical and economic interdependencies of which we have become aware only gradually while economic and industrial development became cumulative and widespread in Europe and North America" [Kapp 1965b, 5]. From an institutional point of view, the developmental process cannot be modeled with the instruments of rational choice theory because of "the fact that different persons may place different valuations on these extra-market phenomena" [1965b, 5]. Kapp applied his basic model--the interplay of cognitions, institutions and externalities--to the analysis of socioeconomic development. In his works [e.g., Kapp 1959, 1965a, 1965n], Kapp always emphasized the role of investment in social capital. His notion of social capital is very similar to the notion of infrastructure [Kapp 1965b, 12]. Infrastructure is the sum of the material (transport networks and communication, energy sector, etc.), institutional (legal system, property rights, norms), and personal (human capital) equipment and facilities that make up the basic functions of market economies. This means that the notion of infrastructure includes investments, commodities, and services that are relevant for regional development and that are not sufficiently (or not at all) provided by the private or market sector. This market failure is counteracted by public provision and/or public regulation. The neoclassical premise of adequate infrastructure is dropped. Infrastructure becomes a subject of the political economy of the state. Arguments for public planning and provisioning are economies of scale, high capital costs, technical indivisibilities,(FN14) non-importability, external effects, public goods character, system effects, long life, and long maturation. Concepts of infrastructure in welfare economics, growth theory, and development theory stress the importance of infrastructure for the development of market economies [Myrdal 1957; Hirschman 1958]. Hirschman [1958] distinguishes between social overhead capital and directly productive activities. Social overhead capital comprises the basic activities without which the primary, secondary, and tertiary sectors cannot function. Kapp criticized Hirschman's strategy of unbalanced growth for causing social costs. Unbalanced growth may cause a cumulative spread of damaging effects [Kapp 1963, 145, 199]. Kapp [1965a, 2] insisted on the importance of the infrastructure concept for the "quality of life and culture which emerge under different forms of economic organization." Infrastructure supply and demand must be analyzed as part of a social process that occurs "within a network of interrelationships from which they derive their pattern" [1965a, 4]. The question of adequate infrastructure supply (in terms of quantity, quality, and location) depends on a qualitative evaluation of the growth process and of the integration on new social objectives in economic decision making. The provisioning of infrastructure is not a function of its economic or technical features, but evolves in a planning process through the agency of collective social actors. Here again, as in his Foundations of Institutional Economics, Kapp formulates a concept of space, place, and time in terms of social relations. The space relates directly to the social and to power. Social and economic relations stretch over space. For example, patterns of a culture of mobility emerge according to space, mode of production, and institutions. We can also consider the emergence of norms and rules of action for the utilization of space concerning, for example, the use of land or the consumption of water. In a case study of the Philippines, Kapp [1965b, 20 ff.] mentions the kaingin system of

land cultivation, a sequence of fire clearing, cultivation, and land fallowing that destabilized under population pressure, new crops, and methods and resulted in soil depletion, deforestation, and erosion. Hence, Kapp [1974, 127 ff.] used to describe patterns of development in India, China, and the Philippines by reconstructing specific social use-values. In particular, his works on policy and planning in contemporary China explored an integrated strategy of development that included development planning as well as health care [Kapp 1974, 9-56].(FN15) Inspired by the cultural approach in anthropology, institutional economics had an influence on self-reliance strategies that aimed at the satisfaction of material and non-material human needs such as participation and democratization. Material, institutional, and socio-personal infrastructures are sources of externalities. We may consider, for example, the spatial distribution of positive and negative externalities. We may also consider phenomena of segregation and disparities. Opportunities of access, of using social infrastructure, are not only socially, but also spatially affected. There is a spatial sediment of supply, possibilities, and capacities. Institutional economics takes the social construction of space and time into consideration. ECONOMIC INSTITUTIONS AND HUMAN NEEDS The preceding has implications for our understanding about needs. Environmental standards have a public character and require the social evaluation of their long-term significance for societies. The evaluation has to start with the basic requirements of human existence, which in turn requires substantial knowledge of basic needs. Needs are the result of a complex enculturation process [Kapp 1976, 166]. The institutional notion of human needs links needs and context. Nevertheless, basic needs are characterized by their non-substitutability. As non-substitutional needs, they form part of the analysis of modes of regulation in economics and social policy. Basic human needs are criteria for the assessment of welfare outcomes. Social indicators for the evaluation of socioeconomic systems and institutions, according to welfare outcomes, take the level of satisfaction of needs as a benchmark. How can we measure well-being with cross-cultural validity? Cultural patterns are social facts that generate their own symbolic representations, even on the level of basic needs. Needs, in the notion of critical policy analysis, are constructs of necessities [Fraser 1989]. The concept of rationality ("material" and "substantive" rationality in the tradition of Weber and Neurath) is part of Kapp's [1965a, 1968a] theory of human needs. Substantive rationality is dependent on reasoning and substantiation in dialogues. Participation and transparency are important; the quality and manifestation of substantive rationality depend on the quality of the democratic structure. This is the pragmatic argument: the articulation of criteria for substantive rationality is based on the notion of an ideal democracy. The scope of social economics contains the construction of substantive welfare criteria as well as the alteration of institutional arrangements to improve allocation or social efficiency. The problem of aggregation of preferences is thus shifted to the political decision-making process. THE SOCIAL CONSTRUCTION OF WELFARE The aggregation problem in welfare theory (aggregation of individual preferences) is now part of the political decision-making process. Dimensions of social welfare emerge in the social discourse. The search for alternative institutional arrangements to improve allocation or social efficiency is a part of

the institutional approach to economics (Figure 1). In this context, efficiency is a function of the societal preferences and of the combination of institutions. The power of definition, articulation, and evaluation evolves in the social choice process. Evidence may become a resource of power. Because of the interrelationship of power and evidence, it is not possible to analyze policies and politics as an exchange process with given preferences at the outset. Policy processes depend on the definition of situations, norms, and interests by collective actors. In his analysis of welfare theory, Kapp insists on the specific conditions of institutionalized legal relations, patterns of action, and decision making that frame the process of construction of social welfare (see Figure 1). The construction of social welfare implies analyzing the effects of social institutions on social welfare and knowing about the reality of power, conflict, and domination [Kapp 1961, 193]. Thus, the benefits of the welfare state depend upon social decisions about what dimensions of valuation form part of the policy analysis. Politics is never merely the exertion of influence by organized political actors. Doing politics is always an act of interpretation, of defining situations and developing identities. This has implications for the definition of social indicators. Social optima depend on the welfare culture of a given society. Welfare institutions and regimes and issues such as environmental protection have to be accepted as public goals that must be qualified by society before they become settled into the process of political decision making. Regarding the problem of externalities, the social construction of the interrelationship of externalities has to be reconstructed. Perceptions of risk and of environmental goods and environmental damage also form part of the analysis. The search for more efficient institutional arrangements includes a values-oriented redesign of institutions (Figure 1). Choice between institutions occurs in a conflicting social process, a process of political-institutional decision making. This is one of the main normative preconceptions of Kapp's institutional approach: he is centering on the formation of substantial values and social issues, not on spontaneous coordination (e.g., the unintended effects of action). The evaluation of the necessity to internalize social costs and the perception of risk depend on the actual institutional setting. Thus, not only transaction costs, but also the perception of individual and social risks by social actors form part of the institution-building process. Kapp's notion of social costs contains cognitive and historical-institutional dimensions. The choice of modes of allocation is dependent on the dominating welfare culture. Production, distribution, and consumption are part of a network of social forces or interdependencies: they are led into the cultural matrix. The reconstruction of societal preferences about social welfare affords a cultural approach that makes it possible to understand the process of definition of relevant externalities. The perception of the social world, of institutions, objective or symbolic manifestations of power and domination, is part of the scope of social economics [Perroux 1960; Kapp 1968b, 24; Dugger 1980]. Social choice has to be contextualized. It is entangled in social, political, and cultural institutions. Policy analysis includes the processes of preference formation, the construction of social issues and social optima. In a filtering process they become transformed into policies and politics. Political action develops in institutionalized arrangements. We are again concerned with the problem of the perception and social valuation of externalities and other interdependencies.

SUMMARY AND CRITICS The emphasis of Kapp's institutional model is on social action recurring through interdependent, embedded social actors. His scientific interests led him to prepare a paradigmatic shift in economics. He was working toward an institutional economics in evolutionary perspective and a constructivist concept of institutions and externalities based on a specific understanding of the role of social interaction in economics. Kapp's understanding of social choice integrates the preliminaries of economic decision making--for example, the genesis of preferences and the formulation of social optima. Thus, the idea of internalizing social costs by reflecting them in taxes or prices has to face the fact that social costs are socially constructed and depend on critical public debate and processes of (social) value formation. They may initiate institutions and enter the political process. Furthermore, they may even react on individual behavior just as they may change policy agendas. Within political economy, institutional arguments condense to the "institutions matter" hypothesis. Institutional research aims at the analysis of the influence of political decision-making mechanisms, of institutional settings, on allocations. The process of political decision making is represented by the choice of welfare criteria.(FN16) Allocation results do not only depend on different types of allocation-allocation by markets, legal allocation (bureaucracy), political allocation (electoral system), allocation by the state or corporatist actors--but also on the institutional framework. Whereas standard welfare economics deals with the maximization of social welfare, institutional theory has explored the composition of value criteria: the social construction of public objectives and social consent with regard to types and results of allocation form part of the research design. The comparative analysis of institutional arrangements, in the sense of comparing imperfect worlds, is embedded in a social and political arena where social issues are constructed and the definition of problems, of relevance, occurs. In the political process, targets are never given but are always changing. In a changing world, institutions, technologies, and social actors are interdependent. Their interrelationship is mediated by perception and interpretation; it is molded by institutions. Whereas it is well known that transaction costs have an impact on institutional choice, Kapp's institutional approach to economics emphasizes the social perception and valuation of transaction costs. Furthermore, his analytical frame stresses a meso-level of institutions, roles, and orientations mediating between individuals, cognitions, and the social structure. Institutions are determined not only by transaction costs, but also by socioeconomic and historical processes. Thus, being not only dependent on transaction costs, the social choice of institutions has an impact on those costs. The perception of transaction costs is influenced by the features and the quality of the social figurations. Hence, decisions over the design of institutions determine the costs. The perception of transaction costs depends on the shape of the social setting (social figuration). Institutions do not only guarantee social efficiency (transaction cost analysis), they constitute action, perception, actor identity, and meaning; they are cognitively mediated. Institutional theory is extending the scope of welfare economics and deals with the core problem of the aggregation of individual preferences into a social welfare function. In critical institutional perspective, politics and policies can be understood as integrating postmodern fragmentary societies. However, looking at the problems of the industrialized countries with a

certain level of needs satisfaction, what is missing in Kapp's institutional economics is a theory of modern welfare states and welfare societies beyond an analysis of collective choice and basic needs--beyond the aim of satisfying basic needs. The development of (post) modern welfare states, of institutions that constitute modern welfare societies, as well as of macro-policy performance, still forms an important task within the scope of institutional theory. Kapp's works bear important insights into the problems of welfare analysis, but his program still has to be realized. ADDED MATERIAL The author is Senior Lecturer of Economis and Social Policy, Department of Economics, Regensburg University, Germany. I am grateful for helpful suggestions from Jon Mulberg, Anne Mayhew, and two anonymous referees. Figure 1. Sequences of the Policy Process FOOTNOTES 1. I refer, among other sources, to unpublished information on Kapp's correspondence and other unpublished works, reflecting the network of scientific exchange between institutional scientists as well as the theoretical core of institutional theory. These can be found in the Kapp archives in Basle, Switzerland. For further biographical data, see Steppacher [1994]. 2. The citation Kapp [1969] refers to an unpublished manuscript The Foundation of Institutional Economics, probably 1969, which is kept in the archives of K. W. Kapp in Basle, Switzerland. The manuscript consists of an introduction and nine chapters: (1) Intellectual Antecedents of Institutional Economics (classical foundations, Mill, Weber, Marx, List, Structuralism, Myrdal); (2) The Nature and Significance of Institutions; (3) Towards a Theory of Institutional Change; (4) The Institutional Theory of Human Conduct and Economic Behavior; (5) Towards a Theory of Human Needs; (6) The Institutional Concept of Capital and the Theory of Capital Formation; (7) The Interaction between Technology and Business Enterprise; (8) Technology and Economy; and (9) The Multi-Sector Economy and the Theory of Economic Domination. 3. For an anthology of Kapp's works on the history and philosophy of social sciences, see Kapp [1961] and the compilation of Kapp's later publications in Ullmann and Preiswerk [1985]. 4. Constructivism means the deconstruction of the social genesis of perception, thought, and action. Veblen [1961] considered this social construction of meaning. The construction of meaning is an observer's activity. Social patterns of interpretation reflect the institutional structure of a given society [see Kapp 1954]. 5. Myrdal's principle of circular foundation means that economic factors cannot be separated from the social system. This methodological imperative is constituted by the fact that circular causation--interdependence--exists among all elements of that system. A social process will usually not move toward a new equilibrium if a change calls forth new supporting changes, which move the system in the same direction. The social process tends to become cumulative because of such circular causation. This process cannot be viewed as a moving equilibrium, where exogenous changes lead to a new state of equilibrium. The changes are endogenous and may cause destabilizing feedback mechanisms [Hodgson 1988, 138 ff.]. 6. The reconstruction of institutional theory in the Myrdal-Lowe-Kapp tradition [see Heidenreich 1994; Tsuru 1993] presents a link to modern socioeconomics because it tries to found a non-dualistic, non-Cartesian approach to social

sciences as discussed by Giddens, Bourdieu, and Alexander. The inherent duality of "agency" and "structure," or of "preferences" and "constraints," is broken up. 7. See, from a contemporary point of view, Hodgson [1988, 118 ff.]. 8. A parallel exists to Bourdieu's concept of habitus [see Bourdieu 1992]. Habitus describes a structure beyond the actor. The concept of habitus is not oriented toward individual attitudes or preferences, but toward collective schemata of perception and action that define the subjective level, the space of possible decisions. Habitus is the mediating level between material and cultural conditions. It is a principle of transformation and mediation and links perception and action, social and economic systems. 9. Veblen, though critical toward the pragmatic philosophy, was an academic disciple of Peirce [see Dyer 1986]. 10. On institutions and needs, see Neale [1987, 1186 ff.], Doyal and Gough [1991], and Gough [1994]. For a critique of the functionalist approach, see Fraser [1989]. 11. See, for example, Kapp [1957]. Kapp left Germany for Geneva in 1933. In Geneva, he encountered the Frankfurt School, also exiled in Geneva. The critical perspective of the Frankfurt School was an interdisciplinary approach to a unified science on a materialistic base. Members were such different personalities as economist Friedrich Pollock and social psychologist Erich Fromm. The friendship of Fred Pollock, as the correspondence between them shows, lasted a lifetime. It was a scholarship from the Institute of Social Research, temporarily located in Geneva before moving to New York, that enabled Kapp to establish himself in the United States. 12. Kapp spent the years 1957-58 as a Fulbright research professor at the Gokhale Institute of Politics and Economics in Poona, India, 1961-62 at Rajasthan University in Jaipur, and 1964 at the University of the Philippines in Quezon City. 13. Kapp [1965b, 2 f.] uses the concept of cumulative social causation in the Veblen-Myrdal tradition. See also Kapp [1970, 17 ff.] and Kapp on Myrdal in Kapp [1978, XII]. 14. Provision in the form of large capacities with a long life-cycle. 15. For further application of the cultural approach in development theory, see Sachs [1980], one of Kapp's disciples. 16. See, from a more contemporary perspective, Sen [1995] and Bromley [1989]. REFERENCES Benedict, Ruth F. Patterns of Culture. New York: Penguin, 1946. Bourdieu, Pierre. "Sozialer Raum und symbolische Macht." In Rede und Antwort. Frankfurt: M. Suhrkamp, 1992: 135-154. Bromley, Daniel W. Economic Interests and Institutions: The Conceptual Foundations of Public Policy. New York and Oxford: Basil Blackwell, 1989. Coase, Ronald H. "The Problem of Social Costs." Journal of Law and Economics 3 (October 1960): 1-28. Dowling, John H. "The Relationship between Anthropology and Economics." Journal of Economic Issues 16, no. 2 (June 1982): 481-484. Doyal, Len, and I. Gough. A Theory of Human Need. Basingstoke and London: Macmillan, 1991. Dugger, William M. "Power: An Institutional Framework of Analysis." Journal of Economic Issues 14, no. 4 (December 1980): 897-907. Dyer, A. W. "Veblen on Scientific Creativity: The Influence of Charles S.

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