Digital Technology and Institutional Change from the Gilded Age to Modern Times: The Impact of the Telegraph and the Internet

By Phillips, Ronnie J. | Journal of Economic Issues, June 2000 | Go to article overview

Digital Technology and Institutional Change from the Gilded Age to Modern Times: The Impact of the Telegraph and the Internet


Phillips, Ronnie J., Journal of Economic Issues


As Ron Stanfield noted in his AFEE presidential address last year, the original institutional economics is currently faced with a historic window of opportunity as the success of the new institutional economics indicates widespread recognition of the need for institutional analysis [Stanfield 1999, 251]. The computer revolution, events such as the collapse of communism, and the substantial contributions of "new" institutional economists, such as Douglass North [1990] and Oliver Williamson [1985], have forced the economics profession to recognize that "history and institutions matter." The challenge today is both to explain the nature of societal change and to formulate policies that will foster rising living standards throughout the world in the twenty-first century.

To the question "why did the Industrial Revolution occur in Europe and not in China?" Clarence Ayres's answer in 1938 was that "the Chinese, as we know, are dominated by tradition, more so perhaps than are any other great people; whereas Europeans are to a similarly unique degree adaptable" [Ayres 1938, 15]. This answer is not enough. Why are some institutions more flexible and more accommodating of technological change than are others? Why does rapid technological change occur in certain places and at certain times and not others? Why do some economies advance and others do not? This is the same question North asked: what accounts for the widely disparate paths of historical change in societies? [North 1990, 6].

In his later years, in both correspondence and in his unfinished manuscript, Ayres uses the terms "technological potential," "technological availability," and "technological accident" [Ayres 1971, 1972]. In a letter to Louis Junker, Ayres wrote:

For a long time now I have been increasingly obsessed by what I am now calling technological availability. ... two factors are present in all invention and discovery: human brain-power and the technological potential of the universe" [Ayres 1971].

I interpret Ayres's use of these terms as a recognition that at any point in time, there is a range of technological possibilities--a choice of technologies. Though the automobile was the culmination of a long string of technological developments, and its invention revolutionized society, how would the path of economic growth and development have differed if the electric-powered automobile had won over the internal combustion engine-powered automobile? How are choices between alternative technologies made? Why are some technologies accepted and some rejected, even if they later turn out to be superior technologies? If Steve Jobs at Apple had taken a different business strategy, would we have ever worried about the Y2K problem in the first place?

More than a decade ago, Dale Bush [1987] and Junker [1982, 1983] introduced the concept of "ceremonial encapsulation." As used by Bush, the term means that new technological innovations "will be permitted only if it is anticipated that they will not disrupt the existing value structure of the community" and "to the extent [ceremonial encapsulation] is successful, [it] denies to the community those technological innovations that the existing knowledge fund is capable of generating, thereby depriving the community of higher levels of instrumental efficiency in the problem-solving process" [Bush 1987, 1093]. Technological innovations that serve the purpose of "strengthening and extending the control of vested interests over the life of the community" are labeled by Bush as being "future-oriented ceremonial encapsulation" [Bush 1987, 1095]. A clear example of this would be Microsoft's(c) tying of its Internet Explorer(c) browser to its Windows(c) operating system. Technology is the dynamic force, as institutiona lists have always maintained, but the institutions and organizations of society determine the particular technology that is utilized in society. This view of institutional change both clarifies the original institutionalists' view and provides a bridge to the new institutional economics because implicit in the use of the term "ceremonial encapsulation" is the notion of competing technologies. …

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