Historical Institutionalism and New Dimensions of Agency: Bankers, Institutions and the 2008 Financial Crisis
| Date | 01 October 2017 |
| Published date | 01 October 2017 |
| Author | Stephen Bell |
| DOI | 10.1177/0032321716675884 |
| Subject Matter | Articles |
675884PSX0010.1177/0032321716675884Political StudiesBell
research-article2017
Article
Political Studies
2017, Vol. 65(3) 724 –739
Historical Institutionalism and
© The Author(s) 2017
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DOI: 10.1177/0032321716675884
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Bankers, Institutions and the
2008 Financial Crisis
Stephen Bell
Abstract
This article argues that historical institutionalism has bifurcated into two competing accounts:
one focused on institutional stasis and the other on change. A more encompassing theory that
accounts for both processes is constructed using a more detailed account of agency – one that
utilises key inputs from cognitive and social psychology. This can better account for the conditions
under which institutional constraint or change occurs and is used to explain the variable behaviour
of bankers in the run-up to the 2008 financial crisis.
Keywords
historical institutionalism, agency, cognitive psychology, banking crisis
Accepted: 15 August 2016
This article argues that historical institutionalism (HI) needs to move beyond its currently
divergent approaches which emphasise ‘sticky’ institutional constraint and path depend-
ency, on one hand, and a more change-oriented, ‘flexible’ version emphasising incremen-
tal change, on the other. The first approach is overly structuralist and has little to say
about agency or endogenous institutional change. The second approach corrects this by
focusing more on agency and endogenous change but says too little about institutional
constraint, stasis or continuity. It also says too little about agency. We know that institu-
tions both constrain and enable agency, producing differing patterns of stasis, continuity
and change. Yet we seem unable to accommodate these empirically observable elements
within one theory. We need to account for both institutional constraint and change. The
approach here develops a deeper understanding of agency, especially by probing the psy-
chological and cognitive origins of the ideas, orientations and motives that guide actors.
School of Political Science and International Studies, The University of Queensland, Brisbane, QLD, Australia
Corresponding author:
Stephen Bell, School of Political Science and International Studies, The University of Queensland, St Lucia
Campus, Brisbane, QLD 4072, Australia.
Email: stephen.bell@uq.edu.au
Bell
725
Moreover, in a world of bounded rationality, deep uncertainty and high transaction costs,
agents tend to want to feel as ‘safe and right’ as possible. In this context, agency, cogni-
tion and ideas are the differentiating drivers of action, accepting institutional constraint,
on one hand, or questioning or mediating such constraint and pushing for change, on the
other. Human agency, especially cognitive orientations and ideas, mediates the relation-
ship between people and the institutions they inhabit. Accepting constraint supports a
sticky HI approach, but for agency-based reasons not previously explored. Wanting to
feel safe and right is also compatible with (usually incremental) institutional change.
Incremental change, therefore, is a function both of ‘wriggle room’ within institutions and
cautious agents seeking to feel safe and right. The in-depth focus on agency, cognition
and ideas in this article reflects a further constructivist addition to HI – in this case one
that adds new cognitive and psychological foundations. The approach here is also appli-
cable to other institutionalisms, especially sociological institutionalism, supplying greater
insight into the cognitive foundations of agency. Application to rational choice approaches,
however, is limited due to its deductive and largely a priori approach to agency.
This article explores the variable cognitive and social roots of ideas, action and behav-
iour that help explain sticky constraint and/or change orientations within institutions.
This cognitive and constructivist approach does not mean that what’s inside agent’s heads
defines the institutional world, largely because agents already confront pre-existing insti-
tutions that partly define incentives and options. Nevertheless, how agents understand
and appraise this world is important and can define whether agents accept institutional
constraints or question and perhaps resist them.
I use this account to explain the variable behaviour of bankers in the United States
and United Kingdom prior to the 2008 financial crisis, especially why many engaged in
highly leveraged trading in mortgage-backed securities and crashed while others resisted
or departed from this trend and defied strong institutional pressures. Most accounts see
the 2008 crisis as driven by reckless, buccaneering bankers. Not so: most of the agents in
question were reasonably cautious and wanted to feel safe and right. The key distinction
explaining bank variability lies elsewhere. True, all bankers faced strong institutional
constraints and pressures from intensely competitive markets to follow the herd and out-
compete their peers. Yet some accepted such institutional constraints, while other did not.
This explains the bank variability in question. Key cognitive, ideational and social factors
were important here. Agents in the banks that crashed accepted prevailing institutional
constraints. A key cognitive distinction in this article is between bankers who relied on
‘fast’ routinised thinking compared to ‘slow’ more questioning and deliberative thinking
(Kahneman, 2011). Most bankers and certainly those that crashed relied on ‘fast’ routi-
nised patterns of thinking, on cognitive heuristics and biases and on prevailing narratives.
They relied on emotions such as trust and optimism and sought social approval and affili-
ation among peers. They were prone to herding and groupthink. Cognitively and ideation-
ally, they were ‘true believers’ in the system in which they operated. They built and valued
institutions and routines as ‘safe harbours’ in an uncertain world, and as it happened,
these tended to support management authority. Yet as boundedly rational agents, they had
unwittingly adopted flawed and inaccurate heuristics, narratives and behaviours which
eventually facilitated the crash.
Crucially, and on the other hand, some bankers resisted such institutional constraints
and pressures, and they avoided the worst of the crash. Bankers in banks such as JP
Morgan, Goldman Sachs, Wells Fargo, Lloyds and HSBC tended to be slower, more criti-
cal thinkers who did not accept prevailing narratives or institutional constraints. They
726
Political Studies 65 (3)
were questioning and resisted following the herd. They also acted within banks (as proxi-
mate institutions) that supported their slow-thinking questioning approach. And they
managed (with difficulty) to resist institutional pressures from wider markets and drove
incremental change.
I proceed by further outlining HI’s current limitations, followed by an account of the
cognitive and behavioural roots of agency. I then apply this approach to explain banking
variability prior to the 2008 crisis. Finally, I probe the limits of agency and institutional
discretion by showing how, ultimately, all agents confronted a form of destructive struc-
tural power, collectively exerted, as the crisis crystallised amidst the freezing of global
credit markets. The banks that had exerted substantial choice and discretion prior to this
were best able to withstand the credit market freeze.
HI and Its Problems
Early, ‘sticky’ HI accounts largely saw institutions as ‘humanly devised constraints that
shape human interaction’ (North, 1990: 3). Stephen Krasner (1984: 225) similarly argued
that agents within institutions are ‘bound within these structures, which limit, even deter-
mine, their conceptions of their own self-interest and their political resources’. He sug-
gested that ‘once institutions are in place they will perpetuate themselves’ (Krasner, 1984:
234; see also Pierson, 2000: 490). The ‘scripted agents’ view in institutional sociology
(Meyer et al., 1987: 3) similarly argues that the ‘characteristics of actors are socially
constructed’ and that action is the ‘enactment of broad institutional scripts rather than
a matter of internally generated and autonomous choice’. For John Meyer (2008: 793),
therefore, ‘exotic psychological assumptions are not required’. Rational choice accounts
with their rational, ‘calculating automatons’ are similar in their approach (Hay and
Wincott, 1998: 952).
These ‘sticky’ views of institutional life all have a very limited account of agency. True
agents might accept institutional constraints – as uncertain, fearful, timid, myopic or per-
haps rule-abiding loyal institutional citizens. Yet sticky HI accounts do not actually
probe agency in these terms and instead largely sees agents as reacting to external stimuli
or incentives. We know that people think and have desires, yet their internal mental states
and cognitive processes and emotions are missing in sticky HI accounts. Indeed, there is
a tendency in the social sciences to adopt simple stimulus/response models of human
agency. Sociology has thus mainly focused on ‘what takes place outside the individual, as
opposed to what happens inside the mind of the individual actor’ (Swedberg, 2012: 7).
Similarly, in behaviourist psychology, incentives drive behaviour. Hence, an actor’s cog-...
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