Constructivist Political Economy

Rawi Abdelal, Mark Blyth, and Craig Parsons

January 14, 2005

13,330 words, including footnotes

Chapter One: The Case for a Constructivist International Political Economy

Introduction: Constructivism – Where to Find it, and Where Not

Social constructivism focuses on the social facts of the world. These social facts

exist only because everyone agrees that they exist. Social facts are very real, and they are

the product of intersubjectively (that is, collectively) held beliefs that cannot be reduced

to a series or summation of subjective, individual beliefs. Social facts differ

fundamentally from material facts, the reality that exists irrespective of collective beliefs

about its existence, but they nonetheless have causal properties.. As John Ruggie

observes, “collectivities of individuals within states hold intersubjective understandings

that affect their behavior,” just as do “collectivities of states.”

Although what we think of as “the world economy” is composed of both material

and social facts, the field of international political economy (IPE) within political science

has tended until recently to focus almost exclusively on the material facts of the

economy. Materialist scholars have attempted to map individual, firm, and government

preferences over outcomes onto these material facts, thereby privileging the rational,

goal-oriented pursuit of policies as the central causal mechanism in accounts of economic

policy making. In IPE, the combination of materialism and rationalism has become the

dominant, even orthodox, view of the world economy.

IPE has been remarkably impervious to inroads from sociological approaches to

economic policy making. The intersubjective beliefs that give the world meaning are

absent in almost all IPE scholarship. Indeed, IPE is increasingly the last bastion for the

materialists and rationalists, who have had increasingly to share the intellectual terrain

with the constructivists on virtually all other topics. Constructivists have made

contributions that are recognized as fundamentally important to economics and sociology,

as well as to every other sub-field in political science. Similarly, economic sociology has

produced a vibrant research program that has influenced policy and management

scholarship as well. As Frank Dobbin observes,

“Sociologists began to explain economic behavior in terms of the same four social

mechanisms they had observed shaping all of social behavior. These mechanisms entered

the common lexicon under the terms institution, network, power, and cognition.

Sociology’s core insight is that individuals behave according to scripts that are tied to

social roles. Those scripts are called conventions at the collective level and cognitive

schemas at the individual level.”

Similarly, cultural, ideational, and institutionalist theorists have made similar

claims in comparative politics for years, without necessarily labeling their focus on

intersubjectivity as constructivist. In the study of international relations however, the

situation was somewhat different.

In IR as a whole, constructivism emerged first in security studies, and with good

reason. By the mid 1980s, Realism’s jettisoning of any and all social elements from its

theoretical core had the effect of making state behavior a reducta of system structure. As

with any theory of the social world in which there is no social, anomalies soon began to

emerge. For example, if the distribution of capabilities were the only determinant of

system stability, why did French nuclear weapons not upset the United States as much as

Chinese ones?

Theoretical concerns soon combined with the failure of such theories to

adequately predict or explain major events of the latter part of the twentieth century.

Thus, one could conclude, that it was hardly a surprise when more intersubjectivist

theories came to prominence. Even within the materialist camp some realist scholars

came to rely on beliefs and cognitive scripts to make sense of sovereignty, the

fundamental institution of the state system itself. Still others sought to incorporate

‘culture’ into realism or sought to recover realism’s subjectivist roots. Indeed, the last ten

years or so has seen a transformation of international relations theory in political science.

In 1994 an edited volume of leading scholars declared the “Neorealism and

Neoliberalism” to be “The Debate.” Yet within a few years some were asking “Is

Anybody Still a Realist?” Meanwhile, its much lauded competitor, “neoliberal

institutionalism” seemed to have all but disappeared from view – as if Scylla could not

persist without her Charybdis.

In a way one could write all this off as expected. If a theory purports to be a

general theory of politics, and that theory cannot explain what are perhaps the two most

important moments of the Twentieth century – namely, World War Two and the end of the

Cold War – then the defense that “two data points do not disprove a theory” becomes

rather feeble. As such, constructivism in IR is simply the inevitable paradigmatic

successor to structural Realism.

While such a reading has merits, we do not wish to accept it and leave it at that.

For another facet of the intellectual developments of the last decade or so is also very

revealing. As noted above, while constructivism swept through IR like wildfire, its impact

on the field of international political economy has been marginal, at least until recently.

Indeed, the collapse of structural and material explanations of international politics has

had little effect on such explanations in the IPE literature. This, we suggest, is because in

this literature, the economy is generally held to be rather different type of place from the

polity.

Unlike the polity, with its mess of identities, ideas, cultures and the like, in the

economic world, while informational uncertainties abound, actors are seen to have a

much more straightforward time of things. They are assumed to have ‘interests’ and

rationally try and follow them, subject to the interests of others and the material

environment in which they find themselves. Indeed, such agents’ interests are usually

derived from the structural position in which they find themselves (sheltered sector

employee, export oriented capitalist, dependent state, service sector firm, etc.) and are

‘actionable’ to the extent allowed by the familiar laws of collective action, resource

availability, and individual rationality. International security politics may be opaque and

driven by identities, but IPE is supposed to be clear, driven by interests, and best

understood rationally.

The purpose of this volume is to challenge such a picture of the economic world

and argue that political economy’s “constructivist turn,” long overdue, is now arriving.

Constructivist explanations of economic phenomena are becoming more commonplace in

the literature with a variety of scholars’ becoming less satisfied with the quasi-

functionalist “just-so” stories offered by materialist-rationalist perspectives. For some,

they simply do not explain enough. For others, they explain too much. Our purpose is to

bring these individual contributions together in this volume, and in doing so, to make

three claims. First, we aim to show how and why a constructivist international political

economy often produces better explanations of political-economic outcomes than

standard materialist-rationalist theories. Second, we intend to tease out the mechanisms

through which the social construction of such outcomes occurs. Third, we and our

collaborators will demonstrate such claims theoretically and empirically in the pieces that

constitute this volume. Our goal is to make a statement for a constructivist political

economy that researchers can actually use.

As political scientists, we of course hope most to influence the research agenda of

political science – in part by bringing the insights of other disciplines to the attention of

others, and in part by demonstrating that the political science scholars who have

employed the analytical frameworks of social constructivism have created a coherent set

of arguments and an innovative collection of empirical methods for exploring the

influence of ideas, norms, identities, and ideologies on the economic practices of

governments, firms, and societies. In this way we hope that constructivist political

economy within political science will cease exclusively to import ideas from sociology

and economics; it is time for political scientists to begin to export their considerable

insights to other disciplines as well.

Constructivist scholars in political science have tended to be puzzle-driven. Many

of the most influential studies of the influence of social facts on politics began with a

research question that simply could not be answered with the standard rationalist and

materialist tools of the discipline. For example, a decade’s worth of scholarship on

important and theretofore unanswered questions in security studies culminated in a

programmatic statement on the influence of norms and identities in world politics – the

“culture of national security.” One result of this volume was a definitive collection of

important empirical questions whose answers were inescapably sociological. The

skeptics could no longer quibble with each individual scholarly contribution. Another

result was programmatic statement of the way forward theoretically (Jepperson,

Katzenstein, and Wendt). We hope in this volume to lay the groundwork for a similar

statement about the importance of constructivist insights into political economy. One

political economy puzzle with a constructivist answer can perhaps be dismissed as

exceptional. A dozen such puzzles, however, suggests that constructivism has, and will

continue to be, systematically useful for understanding how the world economy and

regional, national, and local economies work.

Part One: Clearing the Ground for Constructivism in IPE

The Real Economy and the Constructed IPE

We are aware of the easy criticism that when it comes to the economy, the real –

the material – has been misunderstood by us in our enthusiasm to understand the

ideational – the social – origins of economic outcomes. As The Economist magazine once

put it, the real economy is constituted by ‘things you can buy, sell, and drop on your foot’

and such things are real objects with real effects. As such, the value added of insisting

that such ‘material objects’ are constructed is limited at best. Indeed, the work of each of

the scholars in this volume has been subject to such critique, but it is a critique we feel is

misplaced at best. Instead, we argue that it is important to realize that much of the

economy that is regarded as ‘material’ and ‘real’ cannot in fact be bought, sold, or

dropped on one’s foot. Take, for example, the actual content of a country’s gross domestic

product (GDP) – what it makes, the competitiveness of its products on world markets, the

real and financial interdependences among economies, its factor endowments, its specific

assets. Are these indefatigably real objects? We would in fact, contest that they are, and

they are. While we do not deny that there is much that the material facts of the world

economy can tell us about how governments and societies are constrained and enabled,

which countries grow more and less quickly, and which policies achieve their intended

outcome and which do not, we actively resist such a reductionism for several reasons.

First of all, looking at this broadly, even the putatively material facts of the world

economy include an inescapably ideational element, all the way down through such ‘hard

facts’ as GDP. Although there is a sense in which GDP is fundamentally material in that

one produces wheat and weapons or one does not, how societies account for national

product and national income is a construction. The usefulness of the construction helps to

explain its widespread use among societies, but it is clear that choices have been made

about what to count (e.g., goods and services with market values, rather than the “gray,”

informal economy or activities within households), what not to count (e.g., environmental

degradation and ecological sustainability), and how to count it (e.g., with surveys and

various methods of estimating changes in economic activity). National income

accounting is a social construction that the entire world now takes for granted, and

governments alter their economic policies on the basis of a few basis points of change of

GDP from one quarter to the next.

Second, despite materialist theorists’ prognostications, many of the material

processes of the world do not seem to result in unambiguous outcomes. Causes and

effects often seem to be opaque and linked non-linearly. Take financial globalization as an

example. Regardless of the particular nuances, the materialist theories of the 1990s were

clear. Big spending welfare states would be punished with capital flight in a taxation and

wage race to the bottom. Either such states would converge on the Anglo-American

equilibrium of labor market flexibility, low taxes, and low welfare transfers, or they

would be seriously hurt.

Unfortunately, while the theory was determinate, the facts were not. What we saw

instead was that those states slated most likely to falter were in fact among the most

productive. In short, there were and are multiple stable equilibria under conditions of

financial globalization. Materialist theories of such processes, by ignoring how agents

interpret the environment around them and then take actions, make erroneous predictions.

How globalization impacts a state depends upon how it is seen by agents within that state.

Thus, while the British seek to ‘embrace’ globalization as an opportunity, the French

resist ‘Mondialisation’ as an alien import. Material facts, it seems, can be very under-

determining indeed.

Indeed, despite what orthodox theories maintain, the same is true at the micro

level of individuals and their choices. When one thinks of a micro-level political

economy one tends to think of similarly “hard” concepts such as interests (agents are

assumed to have them, independent of other agents), played out against more macro level

structures (debt levels, the distribution of wealth, the tax burden), and material processes

(such as financial globalization), all of which are held to have determinate effects. Again,

while we would agree that such factors do matter, they do not matter in the way one

usually thinks.

Materialist-rationalist models of political economy typically rely upon an

explanatory structure where material factors are insufficient in and of themselves, to

explain outcomes. By definition, they lack agency, and the way such factors are said to

animate agents is either too simplistic, with automatic and unproblematic readings of

structural variables’ values leading to agents deciding upon unique behaviors in relation

to those values. In some circumstances such an approach to explanation may seem fine,

and indeed, most of the IPE literature takes such a view of its own project. When agents

have clear interests (businesspeople and politicians want to make money and attain

power), when those interests have an straightforward material basis (the agent is a

businessman or politician), and crucially, when the world an agent operates in is

unambiguous (certain actions probabilistically lead to profits or power, other to losses or

defeat), such an approach may in fact tell us what we need to know. That “the dollar fell

on news of a widening trade deficit” for example, or that “better than expected

unemployment figures will lead to a tightening of interest rates” implies clear interests,

definite outcomes, and straightforward causation. Or does it?

Take the example of the trade deficit. It is entirely possible that a widening trade

deficit will lead to a decline in the dollar, but such a process is hardly automatic. It

depends on what actors think a sustainable deficit is, for example, and this comes with no

clear metric. Likewise, a generation ago, lower unemployment may have been met by a

further reduction in interest rates rather than a future rise. Being “inflation averse” is not

an autonomic response of the human animal; it is a learned behavior. As Frank Dobbin

argues, “People in all … places may be self-interested, but the concept of self-interest is

of little use in explaining why people behave differently in different places.”

The point we wish to stress is that material factors such as interest rates,

productivity figures, and capital flows are not self-apparent phenomena that

unambiguously telegraph to agents “what is to be done” according an obvious metric of

behavior. To take an extreme but illustrative example, economies may rapidly deflate,

but the decision to conduct reflationary fiscal policies rather than commit genocide

against a target population is not given by the material circumstances an agent operates

in. This is why a constructivist political economy, one that moves away from seeing

interests and the material context of action as unmediated and unproblematic, is so

important. Key to seeing why this is the case lies in unpacking three notions; interests,

stability, and uncertainty.

Part Two: Making the Case for Constructivism in IPE

Constructed Interests

Beyond the interpretation/outcome problems noted above concerning interests,

the notion of acting on one’s interests implicitly assumes that agents act in their “true”

interests. As the judge of one’s own best interests, whatever an agent chooses can only be

assumed, by the observer, to be the best the agent can do, given subjective expected

utility limitations. To put it bluntly, “interests are interests” and by definition must be

those held “truly” by the agents in question. Yet “true” interests can only be assessed and

acted upon under optimal conditions with perfect information. Only under such

conditions are the full range of alternatives and their relative costs apparent to the agent.

Such conditions are rather implausible and are perhaps never found in situations of

political interest. If information is processed differently by different agents, or if

information is asymmetrically distributed, then interests cannot be “given” by structural

location or revealed ex-post in behavior. Yet, it is precisely these situations that are of

interest to political economists. Otherwise, we are, simply re-describing the obvious in a

somewhat circular manner.

Analysts end up in this position because of a conceptual error present in

materially derived notions of interest: conceiving of interest as a singular concept.

Positing that an agent did something because his or her “interest” lay in “x” over “y”

ignores the fact that the concept of interest presupposes unacknowledged but very

important cognates of interest, such as wants, beliefs, and desires. These cognates are not

analytically separate from interests and must be considered as part of the concept of

interest itself. Seen in this way, specifying agents’ interests becomes less about structural

determination and more about the construction of “wants” as mediated by beliefs, desires,

and the wider social context of action. Interests are social constructs, not material givens,

and should be analyzed as such. Before they can be something that “does the explaining,”

they themselves need to be explained.

As Alexander Wendt has argued, in order to specify interests one must first

specify the beliefs an agent has about what is desirable in the first place, which is an

irreducibly inter-subjective process. We need to consider “what is desired” as a

construction rather than a material given since “we want what we want because of how

we think about it” and not because of any innate properties of the object desired. When

seen in this way, the constructed and inter-subjective nature of desires and beliefs

collapses and a richer constructivist understanding of interests becomes possible.

Uncertainty and Stability in the IPE

Standard political economy explanations problematically assume, as well as

transitivity of preferences and clear interests, a relatively stable structural context in

which choices over possible outcomes are being made. Such an assumption may in fact

be less tenable than it seems. In situations of environmental stability, agents’ interests are

indeed relatively unproblematic since any ambiguities they have over strategies are a

function of two factors; risk and complexity. Under such conditions agents’ interests are

stable, they are just more or less “sure” of how, and how likely they are, to achieve them.

In situations of environmental instability however, how interests are conceptualized, and

thus how outcomes can be explained, changes drastically. To understand why this is the

case, and why such a scenario is as likely than not to characterize the IPE, consider

interests under uncertainty understood as a standard problem of risk.

Back in 1921 Frank Knight made a distinction between situations of risk, where

agents know their interests but are unsure how to achieve them (probabilistic uncertainty)

and uncertainty, where no such probabilities can be assigned. In the former situation,

uncertainty is the result of “the complexity of the problems to be solved...the problem

solving software...possessed by the individual” and incomplete information between

agents. Uncertainty, in this guise, is a function of computational failings and

environmental complexities, nothing more. Agents rank priors and choose among options

to maximize under constraints; some succeed, some fail. The uncertainty faced by agents

in this world is equivalent to gambling with dice; it is risk. This was not what captured

Knight’s attention.

For Knight, uncertain situations are qualitatively different from situations of risk.

If the situation facing agents is “unique,” that is, having no priors to draw on from past

experiences agents can have no conception as to what possible outcomes are likely, and

hence what their interests in such a situation in fact are. Being unable to form “a series of

instances” of like-type events from priors and thus project probabilities, agents’ interests

in such an environment cannot be given by either assumption or structural location.

Given interests, and thus standard notions of action, have little meaning under conditions

of Knightian uncertainty. As Jens Beckert argues “if one can argue ... [that] ... uncertainty

... does not allow actors to deduce actions from preferences ... it becomes important to

look at those cognitive…and cultural mechanisms that agents rely upon when

determining their actions.” Interests, once again, must be seen as constructed.

If this is the case, then the key question becomes, what type of situations do

agents face in the political economy? Are they faced by risk or uncertainty? If the world

is generally “risky” rather than fundamentally “uncertain,” then materialist-rationalist

theories may be justified in treating “stability” as the normal state of affairs and

extrapolating from this basis. Notwithstanding the criticisms offered above,

constructivism might then only serve as a gloss on an otherwise useful and parsimonious

set of theories that explain a great deal. Unfortunately, for such perspectives, uncertainty

may not be the exception in the political and economic world, occurring only in moments

of ‘crisis’ and other ‘creedal periods’ of change. It may in fact be more the norm than we

think. Specifically, agents may assume they act in conditions of risk when in fact they are

acting under uncertainty, with a host of unintended consequences as the result. If this is

the case, then the world pictured by materialist-rationalist theorists may be the exception

rather than the rule, thus opening the door for constructivist understandings ever wider.

To see why this is the case, consider the following.

Taleb and Pilpel argue that in order for an agent to find out if the world one

operates in is risky or uncertain, one needs to generate a probability distribution of likely

events. Unfortunately, the generator of probabilities in the social and economic world

(unlike a roulette wheel) is not directly observable, only the results are. As a

consequence, the future may be risky (priors can be ranked) but it could also be deeply

uncertain (there are no priors). How would an agent know the difference? First of all, to

determine if the future will be like the past, and in the absence of seeing the generator of

reality, we sample from past events with the notion that more information is better than

less. By sampling the past agents try and figure out the probability distribution of future

events. And here lies the first problem.

As Taleb and Pilpel put it, “one needs a probability distribution to gauge

knowledge about the future behavior of the distribution from its past results, and … at the

same time, one needs the past to derive a probability distribution in the first place.” In

other words, to estimate risk one has to assume an adequate sample of past events; but

how much is enough? And perhaps even more disturbing, can more information lead one

astray? Can more information be ‘toxic’? In exploring this question Taleb and Pilpel

explore the four possible worlds facing any agent. Two correspond to situations of risk

and two correspond to situations of uncertainty. In the former two worlds, a probabilistic

political economy will suffice. In the latter two, we need a constructivist understanding.

Our first world is the familiar world of the coin toss where the generator is a two

sided coin. Here we live in a world of certainty. We know the generator has two possible

outcomes, and while there can be long runs of heads over tails over millions of iterations,

one does not need a huge sample to get a reliable probability estimate. Our second world

is similar to that of throwing a die. Given numbers six to one, the expected and actual

means converge rapidly via sampling, and this is sufficient to derive the higher moments

of the distribution. The distribution is reliably “normal” and thus sampling the past is a

good guide to the future. One is not going to throw a “300” and skew the distribution

from a six sided die.

Out third world, so to speak, is a “fat tails” scenario (Gaussian plus Poisson)

where uncertainty rather than risk begins to prevail. Here the generator may be thought

of as a stock market. Though one can sample past data exhaustively, there is the

possibility that large events not seen in the sample may skew the results and become

known only after the fact. For example, stock market returns may seem normal by

sampling, but a “Russian Default” or a “Tequila Crisis” will radically alter the

distribution in way that agents cannot calculate before the fact. This is a world of

uncertainty. Agents simply cannot know what may hit them, though they may be

confident that the probability of being hit is small.

Our fourth world is even worse. Thus far we have assumed some form of

‘normality’ in the distribution of possible outcomes, even allowing for a “fat tails”

scenario. However, imagine a generator such as “the global economy.” In this case,

agents can sample the past till doomsday and actually become steadily more wrong about

the future in doing so. As Taleb and Pilpel put it “it is not that it takes time for the

experimental moments … to converge to the ‘true’ [moments]. In this case, these

moments simply do not exist. This means … that no amount of observation whatsoever

will give us E(Xn) [expected mean], Var(Xn) [expected variance], or higher-level

moments that are close to the “true” values…since no true values exist.”

To see such dynamics in action, consider the following example. Macroeconomics

has had five general theories of inflation over the past fifty or so years, which suggests

two things. First, these theories cannot be general theories since they change every

decade or so. Second, such theories might be thought of as general (at the time they were

constructed given the sample that they are derived from) but such theories must change

since the actual sources of inflation change over time given the highly complex nature of

the global economy. If the causes on inflation in one period, for example monetary

expansion, are dealt with by building institutions to cope with such causes (e.g.

independent central banks), this does not mean that inflation becomes impossible. Rather,

it means that the conditions of possibility change such that the theory itself becomes

redundant. As such, sampling the past to predict the future is not merely uncertain, it

becomes a futile exercise since such underlying dynamics “invalidate our ability to

conclude much from … past behavior to … future behavior; in particular, it makes it

impossible for us to assign any specific probability to future outcomes, which makes the

situation one of uncertainty.”

In situations of risk (worlds one and two) the assumption actors (and analysts)

make is that the distribution of possible outcomes is normal and that by sampling the past

we gain in informational value greater than we add to the risk of error. Unfortunately, in

our third and fourth worlds, this is not what actually happens. In our third world we can

sample the past and compute risk, but such a measure is at best imperfect since we can be

wiped out be something that was not considered at all likely (off model) and thus did not

show up as part of our distribution via sampling the past (a Russian Default, or the

Chinese rapidly switching out of Dollars and into the Euro, for example). We can sample

all day long, but we will have no idea if the expected mean of the sample and the real

mean of the distribution are anywhere near each other; we simply assume that they are,

and act as if they are, for better or worse.

In our fourth world things are even more problematic for materialist theories. We

could be facing a Pareto-Levy distribution where no amount of sampling will work since

these distributions offer no tractable solutions. Such distributions can look just like a

normal distribution until something profoundly unexpected happens, such as a new and

unexpected source of inflation which invalidates the theories developed from sampling

past data. In such distributions there is no mean to sample for since there is no limiting

point of equilibrium; one is completely shooting in the dark. In this world, if there is

stability and certainty, it comes from the actions of agents themselves and not from

environmental properties. Agents themselves construct stability in the face of an

unknown generator of reality.

Given this, which world is the world most likely faced by agents? Our first world

can be ruled out since if the world was so certain, choice, let alone risk, would not be an

issue. Our second and third worlds tend to be the ones pictured by orthodox theorists.

Here the dice may have many more sides than six, but probabilities are computable, and

while “fat tail” events can surprise us, such events are deemed to be exceptionally rare.

Therefore, most of the time we assume a normal or quasi-normal distribution of risk. But

can we really rely on this assumption either as a guide to action or as a guide to theories

which explain actions given the inherent “surprises” that plague the political economy?

Consider that currency movements over a very short period of time tend to move

by far more than one or two standard deviations, and then move very little after that.

Recall that half of the decline in the dollar vis a vis the Yen between 1986 and 2003

happened over ten days, or on just 0.21 percent of the trading time. Remember that

shortly before the East Asian Currency Crisis, Suharto’s “crony capitalism” was being

given awards by the IMF for fostering economic development shortly before it imploded.

Recall that any reasonable portfolio of government bonds designed to hedge against risk

in 1914 would have included Russian, Argentine and German securities, all of which

would shortly be regarded as expensive wallpaper. In short, maybe the world is more like

our fourth world than any other. And if it is, then the need for a constructivist political

economy grows ever greater, for how else can we explain the stability that seems

“normal” in the global economy in the face of such profound underlying uncertainty?

Do Agents Construct Stability in the IPE?

If agents cannot reliably know what future to expect, how then can they create the

stability needed to act in the economy, and indeed, to create stability in that economy if

this is not its inherent nature? Someone who thought about this at length was Keynes. As

Keynes put it in a famous passage:

“We have, as a rule, only the vaguest idea of any but the most direct consequences

of our acts. Now the whole object of the accumulation of wealth is to produce results, or

potential results, at a comparatively distant, and sometimes an indefinitely distant date.

Thus the fact that our knowledge of the future is fluctuating, vague, and uncertain,

renders wealth a peculiarly unsuitable topic for the methods of classical economic theory

... [A]bout these matters there is no scientific basis on which to form any calculable

probability whatever. We simply do not know.”

In response to such profound and pervasive uncertainty Keynes argued that

stability comes about through the generation of market conventions. Conventions are, in

the broad sense Dobbin noted above “Scripts…at a collective level” that govern action. In

the IPE they are inter-subjective understandings agents share regarding how the economy

is put together and how it should operate in normal times. Conventions are self-

sustaining shared ideas and norms that coordinate agents expectations, with such

conventions themselves being reconstituted by agents practices over time. Promoting

economic stability therefore depends upon expectational coordination through the

maintenance of such conventions.

Keynes lists “three techniques” economic agents have devised for dealing with

this situation, all of which are inherently constructivist. First, “we assume that the present

is a much more serviceable guide to the future than a candid examination of the past

would show it to have been hitherto.” Second, “we assume that the existing state of

opinion ... is based on a correct summing up of future prospects.” Third, “knowing that

our own judgment is worthless, we endeavor to fall back on the judgment of the rest of

the world ... that is, we endeavor to conform with the behavior of the majority or

average...to copy the others ... [to follow] ... a conventional judgment.” In short, Keynes’

macro-economy rests upon conventions, that is, shared ideas about how the economy

should work.

For example, a belief in cost push inflation as a convention governing the way the

world works is a prerequisite of designing and maintaining institutions of centralized

wage bargaining. Without agents adhering to this view of the relationship between

inflation and wage growth, such institutions and the practices they enshrine would

literally make no sense to the agents involved. Yet by working within such institutions the

convention itself is valorized. For Keynes, agents’ interests are therefore not given by

material conditions, but rest instead on inter-subjective beliefs enshrined in conventions

and reconstituted by practices. In essence, for Keynes these intersubjective elements are

as important in understanding stability and change in capitalist economies as any ‘brute

fact’ of materiality.

Keynes arrives at this conclusion because of the inherent uncertainty (not

probabilistic risk) surrounding expectations of the future. That is, he sees us living in a

type four world. As he notes, “the most probable forecast we can make...depends upon

the confidence with which we make this forecast.” The problem is that the state of

confidence itself rests upon agents’ expectations of the future, and agents’ expectations

are neither naturally convergent nor self-stabilizing. Rather than agents’ expectations

being an accurate reflection of an probabilistically stable underlying structure, as pure

“interest based” arguments assume, agents’ expectations are instead seen as being

naturally divergent and inherently unstable since they are based on shared beliefs.

Therefore, instead of assuming both that expectations converge and that agents know

what the fundamentals of the economy actually are, Keynes assumes that economic

agents are myopic and look to each other for signals, which explains why conventions

become so important in producing stability. In short, there is no truth about markets “out

there” apart from the prevailing wisdom that markets have about markets themselves, and

this can be a very fickle thing.

A contrast with the natural world is useful here. Causes in the natural world may

be highly complex, but our understandings of those causes have no impact on the

outcomes we observe. For example, what we believe about the motions of the planets

has no impact whatsoever upon those motions. In the economic world however the

problem is qualitatively different because the beliefs that agents have about the impacts

of their actions, and those of others, shapes outcomes themselves. If agents in the

economy hold different expectations about how the economy works, this can lead to such

agents taking a variety of actions, thereby producing radically different outcomes in the

same circumstances. Agents can have a multiplicity of ideas concerning planetary

motion, but such ideas will have no effect on those causal relationships in any way.

An example of this interdependence is Keynesian deficit spending in a national

context. Although the dominant American reinterpretation of Keynesian deficit spending

as a mechanistic ‘multiplier’ effect that could in principle be calculated, it is clear that

there was much more to Keynes. A classic metaphor from Keynes was of two lorries in

the road that could not pass one another. What was needed was a “device,” what we

would now call a coordination mechanism. For Keynes, one possibility was for the

government to provide such a “device” in times of economic distress in the form of

deficit spending. Keynes wrote about such a device as though it were a simple regulatory

norm – each lorry would move a little to the left so that they both could pass. But the

history of deficit spending has shown, among other things, that societies and markets

must attach the same meanings to the deficits, and thereby to draw the same inferences

for the deficits to produce their intended result. Thus the effect of the device cannot

simply be to cause drivers to proceed on opposite sides of the road.

The history of Japan in the last decade reveals how important the social meaning

of economic policy can be. In part as a result of historical memories – necessarily socially

constructed since most Japanese citizens did not themselves experience the economic

policies of the 1930s – Japanese society reacted to government budget deficits designed

to stimulate economic growth in exactly the opposite way that policy makers intended

and theory predicted. Rather than spend more, each expansionary budget package

worried Japanese society about the long-term consequences; the national savings rate

rose, and consumption declined. Some economists described this reaction as perfectly

reasonable, citing Ricardian equivalence about their understanding that the debt would

have to be paid off at some point in the future, and so they could not be tricked – or

coordinated – into being more enthusiastic about the prospects for economic recovery.

But not all societies react as though they understand Ricardian equivalence, and indeed

deficits often signal to otherwise well-informed mass publics that the government has

become serious about inducing a recovery. The only way to understand – either a priori or

in retrospect – how the signals of a budget deficit will be interpreted is to analyze

systematically their social context.

In contrast to rationalist and materialist theories, a constructivist version of IPE

argues that agents’ expectations and intersubjective beliefs constitute causal relationships

in the economy by altering the agents’ own beliefs about the interests of others, upon

which the realization of their own inter-subjectively constructed interests depend. This is

why, in part, whether a given convention is deemed to be “true” or not depends on how

widely it is held. Moreover, this is what makes the assignment of probability values to

outcomes, and hence the concept of “given” interests in periods of uncertainty

impossible: the equilibrium set of institutions to resolve a crisis is a moving target pushed

around by the beliefs of agents themselves. Both general conventions such as “the state

of confidence” and specific ones such as “deficits cause inflation” are ultimately inter-

subjective constructions that have at best a tenuous relationship to market fundamentals

and no precise calculable metric. However, as Keynes notes, “the above conventional

method of calculation will be compatible with a considerable measure of continuity and

stability in our affairs, so long as we can rely upon the maintenance of the convention.”

Seen in this way, the maintenance of such conventions produces stability and stability

itself therefore rests upon the coordination of expectations through the maintenance of

such conventions. Then, and only then, is stability, and thus a new and better

understanding of the political economy, possible.

Part Three: Mechanisms of Social Construction

Output Constructions: Norms, States and National Identities

Given the foregoing, we feel it reasonable to argue that the he economic policies

of governments are social in both their causes and their effects. Economic policies may

be pursued because they are in accord with international norms that define both legitimate

and illegitimate policy practices (for sociologists) or behaviors (for economists), as well

as being materially “in the interest” of states to do so. State and national identities also

influence economic policies by endowing them with purpose and meaning, as well as by

connecting material facts cognitively. The international economy is therefore composed

of norms of regular behavior, as well as norms of appropriate policy practices. The fact

that the legitimacy and illegitimacy of macroeconomic policy practices has changed over

time points to the centrality of such constructions as objects in the political economy that

analysts need to take more seriously.

For economists, many macroeconomic policies are undertaken for the purposes of

“signaling.” Thus, macroeconomic policy making is in part supposed to lead to market

outcomes through real effects – a central bank will, for example, reduce interest rates in

order to encourage borrowing for investment, or a government may increase budget

deficits to stimulate both consumption and investment. But consider that signaling is the

inescapably social content of macroeconomic policy making. There are at least three

audiences for such signals – “the market,” other governments, and “the public.” The fact

that macroeconomic policy making involves signaling is not difficult to understand

within a rationalist theoretical framework. However, a sociological perspective on the

information content of macroeconomic policies allows us to understand better how to

evaluate the fact that the signaling effects of various policies vary across countries and

over time.

For example, research conducted under the auspices of the European Central

Bank (ECB) has argued that signaling understood as rationalists portray the process,

offers an insufficient model of how market participants coordinate their actions. As the

ECB put it, claims concerning signaling “rest on the assumption that financial markets

use information efficiently and form expectations rationally. From such a perspective

greater transparency should reduce forecast errors and is welfare improving almost by

definition.” Unfortunately, signaling hinges on transparency and “transparency hinges on

a shared mode of interpretation,” which is not given by market structure. Moreover,

transparency has many aspects, such as openness, clarity, understanding, and honesty.

The problem is of course that there are no necessary connections between any of these

elements, and they can in fact work at counterpoint to one another. Increasing

information may serve to lower clarity if understanding is imperfect, while honesty may

become a problem despite clarity, again if understanding is not common between the

senders and the receivers. In short, stability supposes common knowledge, and this is not

simply a function of transparency. Interpretation and intersubjectivity are again necessary

parts of any explanation.

Monetary and fiscal policies, capital and labor market regulations, and trade

policies all are actions that lead to inferences by markets, other governments, and

societies. Those inferences have depended on the social context, however. Capital

controls provide one example. Between, roughly, 1890 and 1914 capital controls were

unusual and unorthodox. By 1944, however, with the financial crises of the 1920s and

1930s in their minds, policy makers around the world considered capital controls

orthodox, and the markets followed suit. All developed, capitalist countries employed

capital controls during the late 1940s, and both governments and markets expected them

to continue to do so for the foreseeable future. By 1998, many governments and

important financial institutions, as well as international organizations, in the world

economy had come to see capital controls as unorthodox, even heretical. Capital controls

had gone from signaling heresy in 1913, orthodoxy in 1944, and heresy again in 1998.

That any economic policy will lead to inferences by others, and indeed must lead to

inferences if they are supposed to produce the expected outcome, the content of those

inferences is defined by the prevailing norms of the international economy.

The norms that govern the international economy are often constitutive – that is,

they lead to specific inferences about just what kind of state is implied by a set of

economic policy practices. These norms are often informal, with their legitimacy defined

by the interaction of markets and governments. But the legal rules of international

organizations for their members also influence the development of those norms. The

Organization for Economic Cooperation and Development (OECD), for example, helps

to define the policy practices of “developed” countries. The European Union (EU) and its

acquis, as well as the Copenhagen criteria for new members (democratic, market-based,

respecting of human rights), sets the boundaries for legitimate and illegitimate policy

practices of “European” governments. And the World Trade Organization (WTO) and

International Monetary Fund (IMF) define the practices of “market” economies in trade

and money. As those organizations informal norms and formal rules change over time, so

do the constitutive norms of the categories of states they describe. A “European” state in

1960 could regulate capital flows, run budget deficits of four percent of GDP, devalue its

currency regularly, and protect domestic industry and agriculture with tariffs and non-

tariff barriers. But a “European” state in 2004 could engage in not a single one of those

policy practices and still be considered – by markets, by the European Commission, by

other EU members – “European.”

The constitutive norms of the international economy thus implicate specific state

identities. As Peter Katzenstein summarizes, “State identities are primarily external; they

describe the actions of governments in a society of states. National identities are

primarily internal; they describe the processes by which mass publics acquire, modify,

and forget their collective identities.” The content of state identities is inextricably bound

up with the constitutive norms of international society that define it. National identities,

on the other hand, are sui generis. The content of those identities can be both purposive

and cognitive. The purposive content of national identities helps to assign meaning and

purpose to patterns of economic activity.

It is a straightforward analytical exercise to explore how societies, informed by

their collective sense of self, may interpret the material reality of the world economies in

vastly different ways, and thus reach divergent conclusions about which policies provide

the appropriate solution. The interpretation of economic interdependence is a useful

example. When the Soviet Union collapsed, some post-Soviet societies interpreted

economic dependence on Russia as a threat to national security, while others saw it as a

reason for further integration. There was no disagreement among any of these policy

makers about what the material facts of the world economy were; they disagreed only

about what they meant. Another way that national identities influence economic policies

is from the cognitive content embedded within them. Through this theoretical lens it is

clear that policy makers may have hold very different understandings of how the world

works, or what might be thought of as the causal connections among various material

facts. As noted above, such different understandings may lead agents to make essentially

dissimilar choices in essentially similar circumstances, something rationalist theories are

some of the time wont to explain.

Input Mechanisms: Persuasion, Manipulation and Socialization

In addition to what one might term the output side of construction where norms

and identities operate, we see three main mechanisms of social construction on what

might be thought of as the input side of social construction: the micro mechanisms

through which such constitutive elements as identity and norms of behavior are

themselves constructed. We call these mechanisms persuasion, socialization, and

manipulation. This may not be an exhaustive typology, and there are important variations

within these categories, nor are the mechanisms mutually exclusive at a group level.

Behind any pattern of collective behavior there might be some individuals who were

persuaded into it, some who were socialized, and some who were manipulated. They are,

however, mutually exclusive with respect to any individual. To the extent that someone

orients her action around some social construct due to persuasion, for example, she is not

being socialized or manipulated into that pattern of action. Furthermore, depending on

whether (or when and where) we think persuasion, socialization, or manipulation the

most common or important mechanisms of social construction, we will have different

expectations about how the world “hangs together” and changes.

Persuasion:

Some constructivist work argues that social construction takes place due to the

entrepreneurial action of innovative people. These “carriers” bring new interpretations

into an arena and then persuade others to take them up. In general, the actual creation of

particular new ideas or norms is not something such arguments (or any constructivist

arguments) attempt to explain. Instead they suggest that pre-existing ideas or norms were

somehow at least partly delegitimated, making an opening for innovation, but the specific

invention of new rules, practices, or symbols is an underdetermined act of agency.

Persuasion arguments do then try to explain how other actors were persuaded to accept

these ideas or norms, however—the actual steps of social construction. They tend to

point either to the sheer force of the new concepts, to some qualities of the carrier, or to

the indirect “fit” between the new concepts with existing ideas or norms.

A clear persuasion argument must distinguish these reasons for persuasion from

the objective functionality or logical inevitability of the new ideas or norms (without

necessarily insisting that they are dysfunctional or irrational). To argue that Keynesianism

spread just because it clearly solved tangible problems would obviously not be a

constructivist argument. Instead constructivists might argue that people were persuaded

by Keynesianism due to its relative elegance and simplicity, or due to its relatively simple

connection to experiences in the Great Depression. Similarly, it would not be very

constructivist to argue that a norm spread because it directly made its early advocates

highly successful in tangible ways, leading to imitation. Instead constructivists might

argue that carriers were generally successful people and so were seen as generally worthy

of imitation, empowering them to persuade others even on points that had no logical

relationship to their own success.

Claims about persuasive social construction also depend on the same kind of

separation vis-à-vis existing ideas or norms—emphasizing indirect rather than direct

“fit.” If new behavior is just a logical extrapolation of earlier beliefs then no new

persuasion has taken place. Instead a persuasion argument might show that earlier ideas

or norms supported the new ones without logically requiring them. For example, the

well-established rule of law in postwar Europe did not logically require that new

supranational institutions include a powerful European Court of Justice. Once the ECJ

was created, however, norms about the legitimacy of law helped strengthen the European

institutions more broadly. Skeptics were eventually persuaded to accept new institutions

partly due to their indirect fit with earlier norms.

Once we argue that a norm or idea spread through persuasion, we imply a certain

view of the socially-constructed outcome. Persuasion implies that most people come to

relate to the new norm or idea in a relatively conscious, affective, internalized, coherent

way. If someone believed one thing and then was persuaded of something else, we know

that she did not follow the latter simply because she never conceived of alternatives. This

in turn implies to some degree that she affectively values the new idea or norm: she knew

of other beliefs and chose this one because she “likes it” in some sense. It also implies

internalization rather than socialization to the extent she was persuaded to value

something while aware of alternatives. The agent is more likely to maintain that belief or

norm when she leaves her home context and confronts other alternatives. In broad terms,

the more her ideas and norms are consciously valued and internalized—the more they are

the result of persuasion—the more we would expect her overall package of social

constructs to be coherent. She has thought about her positions, at least to some degree,

and endorsed them.

Manipulation:

This mechanism is less common in the constructivist literature, though it connects

strongly to a good deal of broader scholarship on culture. It suggests that carriers may use

some sort of power to impose a new idea or norm on others, but that then these

“recipients” rationalize the new idea or norm and forget that they ever questioned it. Even

if the latter subsequently gain the power to alter their behavior, they take the new norm or

idea for granted. Beliefs or practices that were once contested (or at least not

spontaneously and broadly accepted) become background elements of a socially-

constructed landscape. It is understandable that many constructivists have shied away

from such thinking. The first part of this two-part mechanism—the step that in which the

real manipulation occurs—features exactly the kind of dynamics constructivism arose to

challenge: an emphasis on the preferences of powerful actors in the generation of patterns

of action.

Yet the second part, in which these new patterns are rationalized as “necessary” or

simply come to be ignored, portrays a process that is no less ideational or cultural than

persuasion or socialization. While first-generation constructivism has implicitly favored

mechanisms that accord a less direct role to power and conscious maneuvering, such

processes fit with much of the constructivist literature. Indeed, manipulation and

rationalization may provide one of the most plausible links between scholarship on

carriers who create or import new ideas (again, the focus of the “ideas” literature) and

scholarship on the effects of ideas or norms once institutionalized (the focus of most

work that is explicitly known as constructivism). As theorists in the “ideas” tradition

repeatedly remark, ideas matter most obviously when powerful actors espouse them and

use their authority or resources to impose them on others. If we can show first that a

powerful actor’s agenda is meaningfully “ideational”— reflecting beliefs or norms,

though not yet widely-institutionalized ones, rather than simple material positioning—

and then that other actors ultimately rationalize things this powerful actor forces them to

accept, the result is clearly a constructivist story.

Moreover, this kind of mechanism arguably connects better to the last several

decades of theorizing on culture than does a persuasion-based view. Once we argue that a

norm or idea enters social construction through manipulation and rationalization, we

imply that most people relate to the new norm or idea in a relatively unconscious,

cognitive, weakly internalized, potentially incoherent way. As discussed above when

dealing with the notion of acting on one’s interest, if someone follows a belief or norm

because he has simply rationalized it as a hard-to-alter fait accompli, he has never been

persuaded that it is the best way to think or act. To the contrary, he orients his thinking

around it only because he never had the opportunity to establish alternatives, and has

either forgotten that alternatives once existed or never knew of them to begin with. He

does not really value the norm or idea, and may even be able to step back and critique it

somewhat—but he finds it difficult to conceive of shifting to alternatives. Since he has no

strong conscious reasons about why his pattern of action is better than alternatives, his

overall package of beliefs and norms is likely to be relatively incoherent.

Socialization:

The mechanism that stands behind most of the current constructivist literature—

sometimes explicitly, usually implicitly—suggests that norms or ideas spread in a

relatively incremental, evolutionary way generated by repeated interaction within groups,

as argued in the above regarding the notion of conventionally based behavior. A group of

people come together in interaction. They could interact in a wide variety of ways, but

either through accident, deliberation, or initial innovative leadership they orient

themselves around certain norms or beliefs. Action becomes increasingly robustly

embedded in the norms or beliefs over time. The social constructs are not entirely static,

however, since norms and beliefs may be constantly reshaped on the margins as they are

reproduced.

Relative to persuasion and manipulation, social construction by socialization is a

decentralized, collective, consensual mechanism. Persuasion and manipulation both posit

strongly-driven carriers who cajole or force others to reorient their beliefs, norms, or

identities. Socialization suggests a more diffuse process in which a group of people work

their way collectively to certain norms or ideas. It implies relatively low levels of

contestation and variation within the group, since such irregularities would disrupt the

repetitive rehearsing or “social learning” by which it posits that norms and ideas enter

individual thinking and action. This in turn makes socialization more distinct from power

and politicking than persuasion or manipulation; it does not depend on carriers with

unusual authority, resources, entrepreneurial spirit, or charisma for social construction to

happen.

If social construction by socialization stands apart from persuasion and

manipulation for its relatively de-centered, and fundamentally social process, it stands

conceptually between them in its implications about the resulting relations between

action and social constructs. In strict logical terms socialization could produce individual-

social relations that were mainly affective (and so relatively conscious, internalized, and

coherent) or mainly cognitive (and so relatively unconscious, weakly internalized, and

potentially incoherent). Agents interacting in a group might reinforce each other’s values

and reasons consciously by reiterating them—effectively persuading each other to

converge on similar affective positions—or might increasingly rationalize prevailing

group practices as necessary and taken-for-granted.

We think constructivists need to be as specific as possible about which of these

input mechanisms (or conceivably others) accounts for the alignment of particular

individuals on certain ideas, norms, or identities. This does not mean, however, that any

argument about social construction must affiliate parsimoniously with one mechanism.

As noted above, the mechanisms are exclusive at individual but not group levels. If

someone was persuaded to align on a new norm then she was not socialized or

manipulated—but other people who aligned on the same norm may well have done so

differently. Indeed, at the group level the mechanisms may often be most powerful in

combination.

This is most obvious with manipulation, which in most instances will depend on the

initial presence of two kinds of actors who relate to social constructions in different

ways: persuaded “carriers” (who are presumably relatively conscious, affective,

internalized champions of an idea or norm even before it is institutionalized, and may

retain a more conscious and affective relationship to it thereafter) and the “recipients” of

manipulation and rationalization (who start out with no interpretive relationship to the

new ideas or norms, but are eventually maneuvered into a more cognitive relationship to

the institutionalized constructs). Persuasion-style accounts are less likely to feature

different qualitative relationships to social constructs, with both carriers and recipients

being “believers” in relatively affective and conscious ways. Still, such arguments at least

posit temporal variation in these relationships across groups, with the “persuaders”

believing in the new ideas or norms before recipients do. Socialization implies the least

variation in dynamics across a group: individuals work their way into social constructs in

a more even collective pattern. But especially as groups get large and interaction more

distant or episodic, it is easy to imagine that behind a well-established social construct

might be some people who have been persuaded of it, some who were manipulated into

rationalizing it, and some who have been socialized into it. Several different mechanisms

could underlie an outwardly uniform pattern of behavior.

Thus concrete constructivist arguments could vary in the mechanism by which

certain individuals come to act within a social construct, and in the mix of such

mechanisms by which a group of people does so. The broadest level of substantive

variation within constructivism—the level at which constructivists might separate into

different schools of thought—will then concern which overall patterns of these

mechanisms tend to dominate certain kinds of arenas or interaction (or perhaps, for the

most ambitious theorists, political action overall). Constructivists who see a great deal of

socialization will tend to have an incremental, evolutionary, relatively consensual and

uncontested view of political dynamics and change. Those who see a world dominated by

persuasion will tend to see order and change in terms of punctuated equilibria, with crises

delegitimating previous thinking and charismatic innovators forging new order (à la

Weber). Those who see widespread patterns of manipulation and rationalization will tend

to see an inherently contested world, with instrumental maneuvering going on within

overlapping, logically incoherent, taken-for-granted bounds. The incoherence of these

bounds may itself be a source of change. Of course the most nuanced theoretical

positions will likely be ones that mix and qualify such generalizations, arguing that

certain kinds of interaction or actors tend toward certain mechanisms. But whatever the

level of these debates—over specific instances, patterns of interaction, kinds of actors or

arenas, or political action overall—they will be the discussions in which constructivists

actually make commitments and contributions about how the world works. It is to these

contributions that we now turn. See John Gerard Ruggie, “What Makes the World Hang Together? Neo-Utilitarianism and the

Social Constructivist Challenge,” in his Constructing the World Polity (London and New York: Routledge, 1998), pp. 12-13. Ruggie draws on Emile Durkheim, The Rules of Sociological Method, ed. E. G. Catlin (New York: Free Press, [1895] 1938) and John Searle, The Construction of Social Reality (New York: Free Press, 1995).

Being a member of a particular religious group has clear causal consequences, but there is nothing “real” about religion. After all, it is based upon faith.

John Gerard Ruggie, “What Makes the World Hang Together? Neo-Utilitarianism and the Social Constructivist Challenge,” pp. 12-13.

Mark Blyth, “Structures do not Come with an Instruction Sheet: Interests, Ideas and Progress in Political Science,” Perspectives on Politics 1 (4), December 2003 pp. 695-703.

See Peter J. Katzenstein, Robert O. Keohane, and Stephen D. Krasner, “International Organization and the Study of World Politics,” in Exploration and Contestation in the Study of World Politics, ed. Katzenstein, Keohane, and Krasner (Cambridge, Mass.: MIT Press, 1999), pp. 38-39.

Douglass North, “Institutions,” Journal of Economic Perspectives, vol. 5, no. 1 (1991), pp. 97-112; and North, Institutions, Institutional Change, and Economic Performance (Cambridge: Cambridge University Press, 1990); Arthur T. Denzau and Douglass C. North, “Shared Mental Models: Ideologies and Institutions,” Kyklos, vol. 47, no. 1 (1994), pp. 3-31, at p. 4.

See, for example, Frank Dobbin, “The Sociological View of the Economy,” in The New Economic Sociology, ed. Frank Dobbin (Princeton, N.J.: Princeton University Press, 2004); Mark Granovetter, “Economic Action and Social Structure: The Problem of Embeddedness,” American Journal of Sociology, vol. 91, no. [WHICH] (1985), pp. 481-510; James G. March and Johan P. Olsen, Rediscovering Institutions (New York: Free Press, 1989); Walter W. Powell and Paul Di Maggio, eds., The New Institutionalism in Organizational Analysis (Chicago: University of Chicago Press, 1991); Joel M. Podolny, “Market Uncertainty and the Social Character of Economic Exchange,” Administrative Science Quarterly, vol. 39, no. 3 (1994), pp. 458-483.

Dobbin, “The Sociological View of the Economy,” p. 4. Martha Finnemore and Kathryn Sikkink “Taking Stock: The Constructivist Research Program in

International Relations and Comparative Politics” HYPERLINK "http://arjournals.annualreviews.org/loi/polisci"Annual Review of Political Science Volume 4, pp. 391-416, June 2001. We would like to point out that the label “constructivist” is irrelevant to us, but it has become a useful shorthand for describing the sociological and cognitive turn in a number of disciplines. We use it essentially as a synonym for “ideational” and include any argument that focuses on interpretive ideas, norms, identities, practices. In short, we think that the direct reference to social construction in “constructivist” makes it a relatively elegant and meaningful label for such arguments

Kenneth N. Waltz Theory of International Politics (Reading, Mass.: Addison-Wesley Pub. Co.) 1979.

See especially Peter J. Katzenstein, Cultural Norms and National Security (Ithaca, N.Y.: Cornell University Press, 1996); and Peter J. Katzenstein, ed., The Culture of National Security: Norms and Identity in World Politics (New York: Columbia University Press, 1996).

Stephen D. Krasner, Sovereignty: Organized Hypocrisy (Princeton, N.J.: Princeton University Press, 1999).

See for example, Alastair Iain Johnston, Cultural Realism (Princeton: Princeton University Press 1995); Gideon Rose,. "Neoclassical realism and theories of foreign policy" World Politics Volume 51, Number 1, October 1998, pp. 144-172.

David A. Baldwin Neorealism and Neoliberalism: The Contemporary Debate. New York: Columbia University Press (1993).

Jeff Legro and Andrew Moravcsik, “Is Anybody Still a Realist?” International Security, 1, vol. 24, no. 2, pp. 5-55(51), October 1999

By which we mean rationality as consistency and constrained optimization, nothing more.

HYPERLINK "http://mitpress.mit.edu/catalog/author/default.asp?sid=B1BE3BF6-A6D4-4438-9E24-31BF3F53FB77&aid=13898"Barbara Koremenos, HYPERLINK "http://mitpress.mit.edu/catalog/author/default.asp?sid=B1BE3BF6-A6D4-4438-9E24-31BF3F53FB77&aid=844"Charles Lipson and HYPERLINK "http://mitpress.mit.edu/catalog/author/default.asp?sid=B1BE3BF6-A6D4-4438-9E24-31BF3F53FB77&aid=9491"Duncan Snidal, The Rational Design of International Institutions: An International Organization Reader (Boston: MIT Press 2003)

Katzenstein, ed., The Culture of National Security. David A. Moss and Sarah A. Brennan, National Economic Accounting: Past, Present, and Future,

Harvard Business School case no. 703-026 (2003). Paulette Kurzer Business and Banking: Political Change and Economic Integration in Western

Europe (Ithaca: Cornell University Press 1994); Herman Schwartz, “Small States in Big Trouble: The Politics of State Reorganization in Australia, Denmark, New Zealand and Sweden in the 1980s,” World Politics 46:4, July 1994, pp. 527-555; Philip Cerny The Changing Architecture of Politics: Structure, Agency and the Future of the State (Sage, 1990).

See for example Vivien Schmidt The Futures of European Capitalism (Oxford: Oxford University Press 2002); Peter A. Hall and David Soskice (eds.) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: Oxford University press 2001)

Colin Hay and Ben Rosamond ‘Globalisation, European Integration and the Discursive Construction of Economic Imperatives’, Journal of European Public Policy 9 (2), (2002) pp.147-167

This is a common theme among the work of the three of us. See Rawi Abdelal National purpose in the world economy: post-Soviet states in comparative perspective (Ithaca: Cornell University Press 2001); Mark Blyth Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century (Cambridge: Cambridge University Press 2002); Craig Parsons A Certain Idea of Europe ((Ithaca: Cornell University Press 2003).

Dobbin, “The Sociological View of the Economy,” p. 2. I refer here to the different decisions taken by the Swedes and the Germans in the interwar period.

See Sheri Berman The Social Democratic Moment (Cambridge: Harvard University Press 1998) A correlate of complete information, situations of certainty, is discussed below. All we are really saying is “because they wanted to do it, they did it, and because we know they

did it (assuming everyone acts on their own best interests) this shows they wanted to do it.” For elaborations of this basic theme see, Isaac Levi, Hard Choices: Decision Making under

Unresolved Conflict (New York: Cambridge University Press, 1986); and Donald Davidson, Essays on Actions and Events (Oxford: Clarendon Press, 1980).

Alexander Wendt, The Social Theory of International Politics (New York: Cambridge University Press 1999) Social Theory, p. 124.

That is, uncertainty applies to agents’ strategies, not their interests, and is a product of the difficulty of assigning probabilities to outcomes, plus the processing of information needed to gauge probabilities in the first instance.

Blyth, following Beckert, has termed this Knightian Uncertainty. Mathematicians call it “wild type” uncertainty.

North, Institutions, Institutional Change and Economic Performance, p. 25. Jens Beckert, “What is Sociological about Economic Sociology? Uncertainty and the

Embeddedness of Economic Action,” Theory and Society 25 (6) (1996), p. 814, my italics. As argued in Blyth Great Transformations… The following thought experiment and the insights it suggests are drawn from the work of Nassim

Taleb Fooled By Randomness: the Hidden Role of Chance in Markets and in Life (New York: Thomson Texere 2004) and Nassim Taleb and Avital Pilpel “On the Very Unfortunate Problem of Not Observing Probability Distributions” (2004) Unpublished Manuscript available at http://www.fooledbyrandomness.com/.

This is seems especially germane if one remembers that when sampling past data an increase in the sample of (x) increases the confidence level by the square root of (x).

Taleb and Pilpel, “On the Very Unfortunate..” p. 2. For an argument that it can see Nassim Nicholas Taleb Fooled By Randomness… All of these examples are taken from Taleb and Pilpel, ”On the Very Unfortunate…” pp. 9-22. Taleb and Pilpel, “On the Very Unfortunate…” p. 10 Taleb and Pilpel, “On the Very Unfortunate…” p. 14. In the 1960s balance of payments disparities were the supposed source of inflation. In the 1970s

technological obsolescence, the social limits to growth, money supply excess, and government largess were all to blame. By the 1980s labor market rigidities were to blame, whereas by the 1990s a lack of financial market credibility was the villain of the piece. Inflation, it seems, can be many things to many people. See Matthew Watson, “The Institutional Paradoxes of Monetary Orthodoxy: Reflections on the Political Economy of Central Bank Independence,” The Review of International Political Economy vol. 9, no. 1 (2002), pp. [GET PAGES].

Taleb and Pilpel, “On the Very Unfortunate…” p. 16 Hence the logic that “more cases is better.” Formally, E(X) is within some small distance of

E(Xn). Taleb and Pilpel, “On the Very Unfortunate…” p. 19. Taleb, Fooled by Randomness, pp. 240, 242-3. As Taleb and Pilpel put it, “many economists dismiss the possibility of assumption #4 [our fourth

world]. We claim that, unfortunately, in economic situations, generators of this type can occur.” See Taleb and Pilpel, “On the Very Unfortunate…” p. 22.

Unfortunately they are not rare. See Beniot Mandlebrot and Richard L. Hudson The Misbehavior of Markets (New York: Basic Books 2004)

Philip Coggan “The Long View: The End of Normality,” Financial Times, July 2 2004. See for example, Joseph Stiglitz, “Sound Finance and Sustainable Development in Asia” Keynote

Address to the Asia Development Forum by the Senior Vice President and Chief Economist The World Bank, Manila, the Philippines, March 12, 1998

Example taken from Nassim Taleb, The Black Swan, forthcoming, As Karl Popper put it, if human knowledge is causal, and we do not know what we will know in

the future, then any assumption about future states of the world must necessarily be incomplete. [CITE?] John Maynard Keynes, “The General Theory of Employment,” Quarterly Journal of Economics,

vol. 51, no. 2 (1937), pp. 213-4. Keynes, “The General Theory of Employment,” p. 214. Similarly, as Keynes summarizes the

General Theory, “we can regard our ultimate independent variables as consisting of...three fundamental psychological factors, namely, the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital assets.” John Maynard Keynes, The General Theory of Employment Interest and Money (New York: Harcourt Brace 1936) pp. 246-7.

Keynes, The General Theory, p. 148.For discussion of this problem of conventionally based knowledge see Hillary Putnam, Reason,

Truth and History (Cambridge: Cambridge University Press, 1981), esp. pp. 103-126; David Wayne Parsons, “Was Keynes Khunian? Keynes and the Idea of Theoretical Revolutions,” British Journal of Political Science vol. 15, no. 2 (1981).

As Hahn and Solow put it, “The way the economy actually does work can depend on the way agents believe the economy to work ... [and] ... the way the economy responds to a policy move by the government can depend on the interpretation that other agents place on it, and therefore on the beliefs about the way things work …. If participants believe that every increase in the money supply will be fully translated into the price level, irrespective of any other characteristics of the situation, then they are likely to behave in ways that will make it happen.” Frank Hahn and Robert Solow, A Critical Essay on Macroeconomic Theory (Oxford: Blackwell Publishers, 1995), p. 150

This is not, we repeat, to say that the entire economy is some kind is social fiction, it is not. But it is to say that the independence we assume that exists between our actions and our observations in the material world may in fact be much more attenuated in the economic world given that how we think about acting shapes our actions and hence the outcomes we observe. There is an interdependence of outcome and observation, not an independence.

See for example Kathryn Sikkink’s explanation of the relative failure of industrialization drives in Argentina compared to Brazil. Sikkink argues that the fact that the Argentine bourgeoisie did not trust the state meant that investment expenditures were treated with skepticism rather than seems as signals to ‘up’ investment and output. Kathryn Sikkink Ideas and Institutions: Developmentalism in Brazil and Argentina (Ithaca: Cornell University Press 1991). For a similar argument concerning the failure of ISI in India see Vivek Chibber Locked in Place: State Building and Late Industrialization in India (Princeton: Princeton University Press 2003).

Moreover, it is probably safer to assume that publics do not, rather than do, operate in accord with the nostrums of rational expectations theory. Certainly that is the major upshot of several decades of empirical public opinion research.

Again, as Hahn and Solow note, “It may be worth noting that one of the ways in which governments influence the economy is by propagating theories about the economy.” Hahn and Solow, A Critical Essay, p. 150.

For example, if agents believe that deficits cause inflation then deficits will cause inflation because like central bank watching, the belief becomes self-fulfilling. If this claim seems problematic consider that during the 1980s the United States federal budget deficit grew fourfold while inflation fell threefold simultaneously. Despite this, investors, especially in the bond market, still acted as if deficits caused inflation and demanded higher real effective interest rates despite falling inflation. Conventions, as well as fundamentals, matter. For a similar argument regarding movements on foreign exchange markets see Gregory P. Hopper, “What Determines the Exchange Rate: Economic Factors or Market Sentiment?” Federal Reserve Bank of Philadelphia Business Review (Sept. Oct. 1997),

This is different from contemporary “cascade” and “mimicking” hypotheses employed in macroeconomics since these are strategies employed by rational agents with given interests.

Keynes, The General Theory, p. 152, my italics. In fact, certain behavior may be produced simply because the governing convention dictates it.

The European Central bank warding off an inflation twenty years after it was defeated serves as on example.

Leonardo Bertolini and Allan Drazen, “Capital Account Liberalization as a Signal,” American Economic Review, vol. 87, no. 1 (1997), pp. 138-154; and Geoffrey Garrett, “The Causes of Globalization,” Comparative Political Studies, vol. 33, nos. 6/7 (2000), pp. 941-991.

As Winkler puts it “In world where - unlike in most standard economic models – cognitive limits matter, more information and greater detail does not by itself translate into greater transparency and better understanding.” Bernhard Winkler “Which Kind of Transparency? On the Need for Clarity in Monetary Policy-Making” European Central Bank Working Paper Series, Number 26, August 2000, p. 18.

Winkler “Which Kind of Transparency….” p. 9 Winkler “Which Kind of Transparency….” p. 5. Winkler “Which Kind of Transparency….” p. 8. For example, the IMF may mandate common standards in banking, but if those common

standards are regarded as an imposition by other local bankers then the meaning of ‘adhering to international standards’ may be radically different among the two groups. How then are such confusions to be avoided?

Nor does this mean the same thing as common knowledge in game theory. Rawi Abdelal, Capital Rules: Norms, Institutions, and the International Monetary System, book

ms..

Peter J. Katzenstein, “United Germany in an Integrating Europe,” in Tamed Power: Germany in Europe, ed. Katzenstein (Ithaca, N.Y.: Cornell University Press, 1997), p. 20.

Rawi Abdelal, Yoshiko Herrera, Alastair Iain Johnston, and Rose McDermott, “Identity as a Variable,” Harvard Identity Project, January 14, 2005.

Rawi Abdelal, National Purpose in the World Economy (Ithaca, N.Y.: Cornell University Press, 2001).

On political economy, see Yoshiko Herrera, Imagined Economies (Cambridge: Cambridge University Press, 2005). In security studies, see Alastair Iain Johnston, Cultural Realism (Princeton, N.J.: Princeton University Press, 1995) and Elizabeth Kier, Imagining War (Princeton, N.J.: Princeton University Press, 1997).

This kind of argument is particularly prominent in the context of European Union political economy, as in Neil Fligstein and Iona Mara-Drita, “How to Make a Market: Reflections on the Attempt to Create a Single Market in the European Union,” American Journal of Sociology 102:1 (1996), 1-33; Nicolas Jabko, “In the Name of the Market: How the European Commission Paved the Way for Monetary Union,” Journal of European Public Policy 6:3 (1999), 475-95.

See Blyth Great Transformations…; Berman The Social Democratic Moment…As the preceding discussion of risk and uncertainty implies, constructivist arguments need not

imply irrational actors. In a world of pervasive uncertainty even highly rational agents would depend on social constructions to orient their action.

Epistemic community arguments tend to invoke this kind of mechanism as well. The legitimacy of science sometimes accords persuasive power to experts. Emmanuel Adler and Peter Haas, “Epistemic Communities, World Order, and the Creation of a Reflective Research Program,” International Organization 46:1 (1992): 367—90.

One example arises as part of the “boomerang model” of norm development and influence developed by Margaret Keck and Kathryn Sikkink. In this process international actors are the carriers with some power to put tangible pressure on recalcitrant domestic regimes; at first domestic leaders reluctantly give some ground to international pressure, and later on internalize the new norms to some degree. See Margaret Keck and Kathryn Sikkink, Activists Beyond Borders: Advocacy Networks in International Politics (Ithaca: Cornell University Press, 1998) and Thomas Risse, Stephen Ropp, and Kathryn Sikkink, eds. The Power of Human Rights: International Norms and Domestic Change (New York: Cambridge University Press, 1999). For a different variant of manipulation, see Craig Parsons, A Certain Idea of Europe (Ithaca: Cornell University Press, 2003).

Peter Hall, ed. The Political Power of Economic Ideas: Keynesianism Across Nations (Princeton, 1989); Kathryn Sikkink, Ideas and Institutions: Developmentalism in Argentina and Brazil (Ithaca, 1991); Judith Goldstein and Robert Keohane, eds. Ideas and Foreign Policy (Ithaca, 1993); Sheri Berman, The Social Democratic Moment: Ideas and Politics in the Making of Interwar Europe (Cambridge, 1998).

The best empirical study of such a phenomenon remains arguable Matthew Crenson The Unpolitics of Air Pollution: A study in Non-decision making (Baltimore: The Johns Hopkins University Press 1971) .

This is precisely the broad view of culture espoused by “practice theory” in sociology since the 1970s, and also the parallel and related shift from Parsonian, affective views of culture to the cognitive, taken-for-granted logic of “new sociological institutionalism.” Pierre Bourdieu, Outline of a Theory of Practice (New York: Cambridge University Press, 1977); Ann Swidler, “Culture in Action: Symbols and Strategies,” American Sociological Review 51:2 (1986), 273-286; Paul DiMaggio and Walter W. Powell, “Introduction,” in DiMaggio and Powell, eds. The New Institutionalism in Organizational Analysis (Chicago: University of Chicago Press, 1991),1-38; Richard Biernacki, The Fabrication of Labor: Germany and Britain, 1640-1914 (Berkeley, CA: University of California Press, 1995).

If socialization does not logically require a certain view of the affective/cognitive divide,

however, it has a historical relationship to the former. As displayed most obviously in Parsonian sociology (and in political-science work based on it, like the “civic culture” literature), cultural approaches that emphasize socialization have tended to conceive of social constructs in relatively affective, internalized terms. See Gabriel Almond and Sidney Verba, eds. The Civic Culture (Princeton, NJ: Princeton University Press, 1963); DiMaggio and Powell 1991.

Manipulation would be less dependent on such distinct relationships (affective carrier-champions and cognitive recipients) in a case where contestation is low and active alternatives are few or non-existent. That is, powerful actors might impose new norms without being very consciously or affectively connected to them. A clear (if extreme) example would be an absolute ruler imposing some new practice on a whim.

As example, an argument that seems to incorporate all three mechanisms at different stages (if a bit implicitly) is featured in Finnemore and Sikkink’s discussion of “international norm dynamics.” They suggest a “life cycle” of norms that begins with persuasion of key actors by “norm entrepreneurs.” This is followed by a combination of socialization and manipulation/rationalization processes that lead broad populations to align on the new norms. Martha Finnemore and Kathryn Sikkink, “International Norm Dynamics and Political Change,” International Organization 52:4 (Autumn 1998), 887-917.

The same point applies to how a single individual comes to relate to multiple social constructs. People might be persuaded of some things (to which they relate in a relatively conscious, affective, strongly internalized, coherent way), manipulated into others (which they take for granted in an unconscious, cognitive, weakly internalized, fairly incoherent way), and socialized into others (to which they could relate either affectively or cognitively, but at which they would have arrived by a more diffuse, indirect historical process).

Unless they posit tightly-bounded social units. Strongly socialized units could well come into conflict.

Abdelal, Blyth, and Parsons

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