09/25/17 - Murat Iyigun: “The Ideological Roots of Institutional Change”

Why do some societies fail to adopt more efficient institutions in response to changing economic conditions? And why are such failures often associated with a rise in traditional ideological beliefs? We propose an explanation that highlights the interplay or lack thereof between productivity shocks, institutions, and ideology. We conceptualize and formalize ideology as the process through which individuals use simplifying heuristics to make generalizations about the complex environment within which they operate. When productivity shocks occur, there is uncertainty regarding how new, more “appropriate” ideologies will interact with the new economic conditions. This uncertainty discourages investment in institutions and the cultural capital necessary to take advantage of new production possibilities, and accordingly, generates ideological movements that place a higher premium on traditional values. Historical analytic narratives support the theory, including Ottoman reform initiatives, the Japanese Tokugawa reforms and Meiji Restoration, and the Tongzhi Restoration in Qing China.