I - Introduction
Max Weber is most commonly thought of today as a sociologist although his academic career included a number of well-known chairs of economics. The paths which lead from Max Weber to modern economics have therefore rarely been recognized. A closer look reveals, however, that Weber’s socio-economic approach owes much to Austrian economics of his time  Holton et Turner (1989), Eisermann (1993), Kim (1996),..., but shows also great structural similarities to modern institutional economics. Even though we find no explicitly formulated general institutional theory in Weber’s work, it nonetheless offers a rich source of knowledge regarding the evolution of institutions and economic change  A number of authors claim that Max Weber’s theory of.... His economic research topic can be phrased as following: Why did rational capitalism with its dynamic growth, rational political power and complex organization of enterprises only emerge in the Western civilization?
Weber ( 1991, p. 15-6) focused not only at the static exploration of how the factor income in each historical epoch was distributed and combined; that is, how the means of production (land, labor, capital) were technically and economically specialized and combined in light of the prevailing property rights structure. He also looked at the dynamic explanation of how technical change, structural change and income growth fostered capitalistic development. It is important to know, however, that for Weber (1910e, p. 472) the economic history of the past was mostly a "history of economic inefficiency". His basic institutional argument is that long-term economic growth was not only the result of a conjuncture of varied growth-stimulating factors, but, even more importantly, the consequence of removing the constraints from growth.
Like North (1981, p. 209), Weber argues that economic history would be best conceived as a "theory of the evolution of constraints". Most societies throughout history have got stuck in an institutional matrix that did not evolve into the impersonal exchange essential to capturing the productivity gains that came from the specialization and division of labour that have produced the Wealth of Nations. The institutional framework constrains people’s choice set, i.e., the menu of choices being determined by opportunities and preferences. Thus, one of the keys to Weber’s economic institutionalism is the evolution of institutional arrangements that defines the incentive structure of economic agents. This institutional arrangement can be understood as the combination of formal rules (organisations, constitutions, laws), informal constraints (norms of behavior, conventions, codes of conduct) and the characteristics of their enforcement  North (1999, p. 15)..
We can identify three main building blocks for this economic theory of institutions: 1) a theory of property rights  For Weber’s reception of the theory of property rights... that describes the individual and the group incentives in the system; 2) a theory of state  For Weber’s theory of the state see Anter (1996), Zängle..., since it is the state that specifies and enforces property rights; 3) a theory of ideology that explains how different perceptions of reality affect the reaction of individuals to the changing objective situation. Without an explicit theory of ideology or, more generally, of a sociology of knowledge, there are immense gaps in our ability to account for either current allocation of resources or historical change. An improved understanding of institutional change also requires greater understanding than we now possess of just what makes ideas and ideologies catch hold. In my opinion, Weber offered an answer to this problem, which is still relevant for research in the field of transformation economics.
In the following, I concentrate on three tasks. In the first part, I reconstruct what I see as the most important features of Weber’s institutionalism, namely the interrelations among ideas, interests, institutions and social orders. In the second part, I demonstrate how Weber applied this institutionalist approach by looking at his economic explanation of the hampered economic development of China. Why did the China of Weber’s days not fully transform to a capitalist economy? In the third part, I finally make a few proposals as to how modern research in transformation economics could be enriched by Weber’s concept.
II - Max Weber’s Economic Institutionalism
From a broad perspective one could say that Weber examined the interdependance of ideas, interests, institutions and social orders, as well as their socio-psychological foundations in various cultures and over long periods of time. He wanted to investigate how the change in economic practices was interrelated with a change in cultural mentality. In other words, he examined how economic evolution and cultural evolution are connected.
Three questions dominated these investigations: 1) How do formal and informal institutions evolve? 2) What are the relationships between formal and informal institutions and individual actions, i.e. what influence do institutions have on the behaviour of individuals and vice versa? 3) What is the connection between a society’s institutions and its economic development? In other words, Weber ventured to answer proximate questions that dealt with the reciprocity of interests, ideas and institutions in order to discuss ultimate questions that dealt with the evolutionary development of social orders, which determine the economic development of a society. He was fascinated by feedback-procedures, that is, procedures which lead to the emergence of new economic structures mainly through a change of formal or informal institutions. He used historical narratives, i.e. historical reconstructions or scenarios of those events that most probably led to the evolution of social institutions and social orders.
Weber (1910d, p. 459) is known to have argued for the replacement of the term "society" with the terms social relations and social institutions. He saw institutions as a representation of the "rules of the game" (Spielregeln)  Weber (1910d: 459, 1910c: 444). upon which human behaviour bases itself. Institutional rules of the game decide which behaviours and characteristics are rewarded or sanctioned and which social type is selected  Without exception, every ordering of social relationships.... As is the case for institutionalist economists, Weber saw it as one of the main tasks to relate aspects of rational economic behaviour to this rule-based behaviour.
According to Weber (1922, p. 21 [1978, p. 40-1]), economic societation (Vergesellschaftung) is founded in a rationally motivated adjustment of interests and in a rational connection of interests. It is in economic theory that interest-driven analysis has its clearest expression. Every economic action is undertaken by the actors in order to satisfy their own ideal or material interests. In economic analysis, material interests count most, but Weber was also extremely interested in what happens when those who pursue ideal interests look after their material interests, when the two types of interests collide, when ideal interests reinforce or block material interests  For Swedberg (1998, p. 5), the result of Weber’s approach....
It is here that ideals come into play. According to Weber, "interests (material and ideal), not ideas directly govern human behavior. But: the Weltanschauungen created through ’ideas’, like guiding spirits have often determined the way along which the dynamic of behavioural interests has advanced"  Weber (1922, p. 109 [1978, p. 184]); (1915-20, p. .... How can the relationship between interests, ideas, institutions and social orders be defined yet? Following Lepsius (1990, p. 7), we can formulate a working hypothesis, which serves as a guideline for the following discussion of the role institutions play in connecting interests and ideas:
"Interests are based on ideas, they have need of valuation for the formulation of their aims and for the legitimation of the means with which these aims are pursued. Ideas are based on interest, they manifest themselves at positions of interest and through these they obtain a power of interpretation. Institutions form interests and offer procedures for their realisation, institutions validate ideas in certain behavioral contexts. The battle of ideas, and the conflict between institutions make way for a continual creation of new social constellations which leave the way open for historical development. Out of interests, ideas and institutions, social orders come into being that determine people’s lifestyles, personalities and value systems."
In socio-cognitive terms, institutions represent the structuring principles of collective value systems. Ideas and interests manifest themselves in institutions. If institutions represent the implicit and explicit rules of the game in a society, then they fulfil a constitutive and a regulative function, in that they define approaches to problems as well as offering and stabilising behavioural patterns. They limit the choices of the actor and form a frame of reference. These frames of reference define the conditions within which conventional forms of economic reason suffice and set the parameters according to which strategic action is taken. Economic subjects optimise their behaviour according to these regulations. The formulation of interests, moulding of preferences, structuring of incentives, the perception of behavioural possibilities as well as the calculation of associated costs and benefits are embedded in institutional arrangements. Only the institutional context gives meaning to an individual economic choice within a social system. This context creates a basis upon which individual behaviour can be understood through an economic praxeology.
This institutional approach differs from mainstream economics in that it does not presuppose an unchangeable actor with given preferences and functions, but rather aspires to the idea of interactive and mouldable individuals who are embedded in a net of institutions. This does not lead to a "top-down"-theory of social or cultural determinism, according to which individuals are moulded by institutions in a way that leaves no room for autonomy or independent behaviour, but rather an "upward downward causation"  Hodgson (2000, p. 326).. Individuals have influence over the constitution, stabilisation and change of institutions, just as these orient and stabilise individual behaviour.
"The growth and mutations of the institutional fabric are an outcome of the conduct of the individual members of the group, since it is out of the experience of the individuals, through the habituation of individuals, that institutions arise; and it is in the same experience that these institutions act to direct and define the aims and end of conduct."
From this point of view, economic culture can thus primarily be understood as institutional culture. An economics that takes culture into account must then examine the reasons for the initial development, maintenance and change of such systems of norms and their role in the orientation of economic behaviour. The guiding question is pragmatic: What positive or negative influence does culture have on change in economic systems? The value systems and cultural models according to which political and economic processes are coordinated are then themselves the object of a comprehensive analysis of socio-economic change. As Wesley C. Mitchell (1910, p. 203) once expressed:
"Social concepts are the core of social institutions. The latter are but prevalent habits of thought which have gained general acceptance as norms for guiding conduct. In this form the social concepts attain a certain prescriptive authority over the individual. The daily use by all members of a social group unremittingly moulds those individuals into common patterns without their knowledge, and occasionally interposes definite obstacles in the path of men who wish to act in original ways."
Individual abilities and techniques are encoded in the process of social learning within the "cultural matrix" formed by institutions. Once they have been proven in practice under certain conditions, they become a part of the long-term repertoire of behaviour, i.e. patterns of regular and recurrent behaviour or routines  This process can also be defined as the formation of.... Individuals generate social patterns through decision making, strategy following, value maximisation or through forming coalitions. An institutional culture consists of a bundle of characteristic types of behaviour that, in the long term, stabilise a social system. These patterns of social behaviour conveyed by institutions are adapted to their respective environments. Such an institutional culture represents a knowledge system, formed and constrained through the way in which individuals acquire, organise and process information and through this create models of reality.
If the explicit and implicit institutional rules of the game define the actors’ incentive structure, then they have some influence on which economic strategies actors regard as advantageous. The economic competitiveness of firms, in fact of an entire economy, can therefore be understood as a function of its institutional rules. The institutional culture functions here as a strengthening mechanism that can replace external with internal controls and external sanctions with internal ones (e.g., work-ethos). As a result, the economic development of a society is not only a function of its technological abilities or its financial and human capital, but also depends on its respective historical and cultural experience. If the respective institutional culture is a milestone of socio-cultural evolution, then the path already trodden is important. We can conclude from this that the welfare of an economy is above all a function of its institutional environment, its institutional arrangements as well as its social embeddedness  Smelser and Swedberg (1994, p. 18) distinguish among.... The economies of developing countries do not often end up on a long-term path of economic growth, because these countries fail to establish a growth stimulating social and economic order.
III - Economic Institutionalism and Economic Ethics: A Case Study
In his essays on the Economic Ethics of World Religions, Weber wanted to review the relationship of the most important world religions to the economy and social stratification of the society in which they are embedded. The starting point for this socio-historical comparison was the ideal of economic ethics as formulated in The Protestant Ethic and the Spirit of Capitalism. These essays were intended as a "contribution to a typology and sociology of rationalism" (Weber 1915-20, p. 210). In his revised version of the Protestant Ethic of 1920, Weber (1904-20, p. 162) claimed that one of the purposes was to uncover that there is a plurality of different meanings of "rationality". He also meant to show that the history of rationalism is in no way a development that progresses linearly and analogously in various areas of life (law, economy, religion), but rather, modernised and traditional spheres of life co-exist with each other (1904-20, p. 32).
In his studies on China and on Confucianism – as one part of his Economic Ethics of World Religions – Weber demonstrated how the failure of Chinese economic transformation up until Weber’s time can be traced back to constraining formal and informal institutions. The interests and ideology of the leading political class were primarily responsible for the origin of these institutions, which hampered the development of new technologies, new social and economic interaction-patterns and new political structures. Neither the continual population increase nor the development of a money economy have supported capitalist development in China up until Weber’s time. On the contrary, the traditional and stationary forms of the economy, technology and administration were only strengthened. The huge increase in population led to an enormous increase in both the rural population and the number of small farms. For Weber (1915-20, pp. 36-7, 72-3), a central problem was accounting for China’s failure to make the economic transformation to a capitalist market economy.
Weber followed a double strategy in his representation of these correlations. He first described the reasons for the hindrance of economic growth in China, which can be described as a combination of economic involution (i.e., the stabilization of a negative growth pattern) and state involution (i.e., the decline of state functions, especially the decline in supply of public goods). Then he analysed the reasons for the reactionary aversion to reform shown by the leading political administrators of China, the Mandarins. Besides their material interests, Weber saw the reasons for their lack of ability to reform above all in their social habitus.
An economic involution is characterised by lacking, sometimes even negative economic growth. Economically speaking, redistribution mechanisms of income and wealth within the primary (agricultural) economic sector have opened the possibility of using the factor of labor even if the marginal productivity of labor lies below the market wage rate. However, in China’s work-intensive rice cultivation, the family as production unit has proved to have significant transaction cost advantages over market-mediated employment relationships. The high labor intensity of small farms and their economic superiority was clearly revealed in the land prices and in the relatively high interest rates on agricultural mortgages. A pattern of growth was thus stabilised, in which a permanently high demand for children and endogenous impediments to the establishment of new forms of organisation and new technologies were perpetuated. As a result, the cheap production factor of labor substituted the relatively expensive production factor of capital. Rationally organised large agricultural firms were unable to arise, due to the state interest in taxing many small businesses, but also because of the reigning inheritance laws. Technological modernisation was almost impossible due to the extensive division of farmland  Weber (1915-20, p. 94)..
The reasons for the underdevelopment of commercial capitalism are also to be found in the state involution, i.e., the decline of state functions, especially the supply with public goods. The Chinese patrimonial form of government resulted in a patrimonial administration and jurisdiction, whose arbitrariness hindered a stabilisation of the rational expectations of economic agents  According to Weber (1915-20, pp. 140-1), Chinese patrimonialism.... The patrimonial welfare state with only weak authority lacked a feeling for formal legal development. There were neither politically autonomous cities, nor guaranteed legal institutions. The principle behind jurisdiction was not formal law, but rather ideas of material justice (e.g., family clans, seniority)  Weber (1915-20, pp. 108-9).. It is characteristic for China’s state involution that an erosion of traditional order at a local level did not correspond to the establishment of a strong central bureaucracy.
This negative development was principally pushed by the Chinese civil servants, the Mandarins. These state officials financed their income from the tax paid by their district of administration, minus the set duty passed on to the emperor. The income from tax and the private income of these officials were thus not clearly separated from each other. The gross income of the official was initially meant to cover official costs and administration related responsibilities. The private monetary interests of the provincial officials and their families stood in the way of rationalising the empire’s central administration  Weber (1915-20, pp. 97, 104-5)..
The monetary economy even encouraged the increasing distribution of state income to state officials and therefore the traditional financial particularism  Weber (1915-20, p. 77).. Local tax collectors were only sufficiently motivated to collect taxes for the state if a significant proportion of the extra income was diverted into their own pockets. Hence, the most economically momentous consequence of the tax farming system was that the central government’s income could only be raised disproportionally to the actual tax-burden on the population. The legitimacy of the central government suffered when economic subjects were unable to see an increase in results equivalent to the increased tax-burden. Furthermore, if the state is confronted with a growing need for income due to exogenous factors (e.g., military expenditures), then there will be an endogenous pressure to resort to inflationary deficit spending  Weber (1915-20, p. 83-8)..
In the end, the Chinese modernisation dilemma is a result of economic and state involution. The economic development of China became ’locked-in’. The economic involution quickly led to the erosion of taxable per-capita income above the level of subsistence. Then the negative effects of state involution on the society’s supply of public goods were increased because of exogenous expenditure obligations. The result was a vicious circle: each war-related demand led to a sell off of sinecures, which were the sole means of finance available to the central government  Weber (1915-20, pp. 132-3).. Malthusian crisis phenomena were intensified by this, because state infrastructure (e.g., water supply infrastructure) had to be neglected. Chinese Foreign trade, on the other side, had too little impetus to lastingly break the economic involution. The state involution was thus a decisive obstacle to the long term economic development of China.
IV - Confucianism and Mandarin Ideology
Weber saw a connection between the economic and state involution of China – i.e., the formal institutional arrangements – and the ideology of the Mandarins – i.e., the informal constraints of the leading political class. The Mandarins were generally believers in Confucianism, which succeeded in establishing itself as a state philosophy with canonical value and in claiming the legitimacy of traditionalism. They shared in the legitimate power of the Chinese emperor and were therefore looked upon as an institution of divine right  Weber (1915-20, pp. 52-3, 143, 158). In their literature they created the "definition of government", above all the ethos of "official duty" and of "the public good"  Weber (1915-20, p. 114).. However they did not develop economic or trade policies in the modern sense. Their economic views resembled those of the German cameralists  Weber (1915-20, p. 200)..
Their social prestige was grounded in their literary education, which was the necessary qualification for their office. The education of a civil servant aimed at the cultivation of a "class-related nobility ideal of the comprehensively educated Confucian ’gentleman’"  Weber (1915-20, p. 149).. This gentleman should strive after the perfection of his personality by applying and following those virtues imparted to him by his education. The Confucian "pedagogy" was intended to produce a personality according to the Confucian ideal: a person with certain internal and external attitudes to life  Weber (1915-20, pp. 120-1).. These attitudes were to be achieved through thorough literary cultivation based on an orthodox interpretation of the classics and the consequent appropriate way of life. In the end, a similar social and economic background and the same education formed a distinct social habitus of the Mandarins. The Confucianism of the Mandarins became a codex of political maxims and social rules of etiquette for educated gentlemen. Weber (1915-20, pp. 177-9) speaks of an "ethics of intellectuals" or an "ethos of literary intellectualism", which was characterized by milieu-specific attitudes such as intellectual pride, high-mindedness, and honour:
"As a result the civil-servant class’s immanent world-view, with which nothing attempted to compete – not rational science, not rational artforms, rational theology, jurisprudence, medicine, natural sciences or technology, nor divine or evenly matched human authority – could realise its own practical rationalism and create a corresponding system of ethics, constrained only by the power of family tradition and superstition. None of the other elements specific to modern rationalism that have been constitutive of Western civilisation stood alongside it, neither as competition nor as support"  Weber (1915-20, p. 142)..
In his rejoinders to the critics of The Prostestant Ethic and the Spirit of Capitalism, Weber (1910c, p. 447) speaks more generally of the shaping of a collective or group habitus (Gesamthabitus). Habitus can here be understood as a system of mental dispositions of social actors. A habitus is culture and history dependent and results in perception, thought and behaviour schemata. Cognitive and evaluative schemata combine in the habitus into a generative principle of social custom. This applies for example to the aesthetic, religious, political or moral sense of appropriateness, responsibility or duty. The habitus is also dependent on social structure, i.e., on the specific position that an actor holds within the structure of social relations. It is formed through an internalisation of the external social, material and cultural conditions. In complex societies, these conditions are social milieu or class specific. The socialisation of an actor, his or her socialising practice, is therefore significant. The incorporation of external conditions of existence into a habitual system of dispositions takes place through pedagogy, but may also be the unintended result of conduct imperatives  Later on, Bourdieu (1987, p. 128) called this the "cunning.... In this way, external social structures are transformed through education into internal cognitive, evaluative, motivational and behaviour generating structures. It is not the behavioural practices themselves that are set by the habitus, but the scope of possible behaviour.
Now, what are the results of Weber’s economic study of China and Mandarin ideology? Economic instrumental rationalism, as the basis of every enduringly successful capitalist market economy, is dependent on people’s ability and disposition to a rational conduct of live, i.e., the development of a modern "economic spirit"  Weber (1920, p. 12).. Where this has been hindered for cultural or socio-psychological reasons, the success of a capitalist economic system has met with strong internal resistance.
Economic interests are not directly determined by religious ideas or world-views. The latter do, however, have an influence on the basic conditions under which economic interests are realised. Religious views work through stereotyping to constrain economic actions, since every change in tradition can conflict with religious interests ("that which is holy is unchangeable")  Weber (1913-14, p. 131).. Particularly important are religious concepts of duty as a kind of informal institutions. In the form of a religious ethic they influence the way of life of those social groups that can be identified as the most influential cultural carriers  Weber (1920, p. 13).. These concepts are formalized by intellectuals who attempt to give their way of life an integrated meaning  According to Weber (1915-20, p. 209), they are the.... The historical development of religions thus depends on the direction that the respective intellectualism takes. This assumption was important for the strategy of Weber’s (1916-20, p. 261) comparative investigations, because the constellations of interests impressed on society through education and brought about by the objective social situation are empirically tangible. Important questions are: What systematically rationalised world-view does the religion represent? How should one behave with respect to this world-view? What social habitus is a religious believer supposed to adopt?
Weber assumed that every religious ethics was systematically oriented towards a clearly formulated way of salvation – e.g., the Calvinist idea of being put to the test – that allowed a differentiation between valid norms and empirical practice. If one wants to examine the influence of a religion on a way of life, one must differentiate between its dogmatic teachings and the actual behaviour that it in practice rewards – under certain circumstances even in contradiction to its original intentions  Weber (1923 , p. 310).. Religious ethics have different depths of intervention in the sphere of social order.
Religion is a constitutive principle of action, upheld by specific social classes. It is exactly this connection of religion to social classes that explains its successes, but also restricts its domain of validity. The economic constraints of various social classes (peasants, warriors, administrators, the middle class, slaves, proletarians) as well as their social situation (negatively or positively privileged) have been the object of religious legitimation  Weber (1913-14: 253-4).. The result was a social stratification model that tied the validity of a religion to its achievements for the various social classes. Every differentiated society naturally has numerous different religions corresponding to its inner social architecture.