Institutional Change and the IT Revolution: Dialogue

Masahiko AOKI (Professor, Stanford University, and President, RIETI) and Shumpei KUMON (Professor and Executive Director, GLOCOM)

Modernization Process in Terms of S-shaped Waves

KUMON:
First, I would like to consider a hypothesis that may be called an "S-shaped wave" process as a rough framework to overview social change. The S-shaped wave consists of three phases, namely, the initial emergence phase, the break-through phase, and the final maturity phase, where in the maturity phase there may well be some overshooting and correction, and after this phase normally there will be stability and integration into existing systems.

Based on this idea, the modernization process can be viewed as a process of empowerment of individuals and organizations in some sense or, in other words, a process of enhancement of instrumental power, where we should focus on what instrument is enhanced in power, depending on the phase of modernization. My hypothesis is such that military power is enhanced in the emergence phase. Then economic power is advanced in the break-through phase, and finally intellectual power is enhanced in the maturity phase. Furthermore, these phases are associated with the emergence of social entities, whether individuals or organizations, that lead the respective phases of modernization.

In the initial militarization phase, modern sovereign states emerge and compete for national prestige by trying to acquire and exercise the power of threat and coercion in what may be called a "prestige game." In the next industrialization phase, modern enterprises emerge and compete and play what may be called a "wealth game" by accumulating and displaying the power of bargaining and exploitation. In the current "informatization" phase, however, new organizations, which are very different from modern states or enterprises, may emerge in society at large. In fact, they have already been born in the form of NGOs and NPOs, and their numbers are increasing significantly in recent years, although there is no general consensus yet as to what those new organizations really mean for our society. I call those organizations "intelprises" in the sense that they try to exercise their intellectual influence, and their competition "a wisdom game."

This kind of society, namely the "information society," may be considered the final phase of modernization in a broad sense. The present situation corresponds to an overlapping phase of the maturity of industrialization and the emergence of the information society. In the previous overlapping phase in history, we had the maturity of nationalization and the emergence of industrialization, when the national economy was born out of the modern bourgeois revolution. In the current phase of industrial maturity and economic globalization, local communities with "glocal" properties are emerging, as Marshall McLuhan predicted with his concept of "global villages."

AOKI:
It is very interesting to grasp social change in the framework of S-shaped waves. For the sake of our discussion, let me try to relate that approach to the process of social change as I see it. I think we can conceptualize institutions as shared beliefs possessed by people at large regarding how the game is played in society, although people do not necessarily have to agree in their meanings.

If, for example, people generally expect that employers can dismiss employees at their discretion, such an authoritarian employment system may be considered an "institution." We call it an institution, because that is commonly expected to happen, although employees might consider it a means to exploit and oppress them, whereas employers would probably regard it as a necessary instrument to discipline lazy workers.

However, there are times when a shake-up occurs regarding beliefs as to how the game is played, and Japan is currently in such a situation. That is what can be interpreted as the period of institutional change. In that sense, our history is evolving as a number of S-shaped waves are overlapping with each other. It is a very interesting viewpoint, indeed.

KUMON:
I think that various processes are simultaneously taking place. Roughly speaking, modern society itself is entering into a maturing process, while a post-modern civilization is gradually emerging or at least can be expected to emerge in the foreseeable future. Regarding the current terrorism, for example, we might say that terrorists' way of thinking can be viewed as a product of a religious civilization that is older than and different from the modern civilization, but on the other hand it may be regarded as a kind of forerunner of the next civilization.

We need to look at the overall situation where an information society is emerging, while the process of industrialization is maturing at the same time, and it is not true that industrialization is disappearing and has been replaced with informatization. As the process of industrialization has been going through a series of industrial revolutions, it may be correct to say that the third industrial revolution with ICT (information-communications technology) is currently taking place. But at the same time, the previous heavy-chemical industrial revolution is still continuing and maturing to become overripe. Furthermore, the initial process of nationalization/militarization has not yet disappeared, but has entered the final phase in which terrorist groups are provoking a nation to wage war against them.

Japan in the Midst of Institutional Change

AOKI:
We can certainly feel that we are currently at a juncture point in history, and share the recognition that the formation of the so-called information society is being triggered by advancement of information technology, that is, accumulation of digitalized information, and universal access to such information.

However, I would like to point out that there seem to be two aspects to what Dr. Kumon has said. On one hand, initially there is said to be a barbaric era of nationalization with national violence, to be followed by an era when private enterprises emerge as important players in the wealth game, and finally there is a higher and more developed stage, that is the stage of information society. This somehow sounds like a development stage hypothesis of the Marxian type, and appears to be saying that society is moving up to a higher level step by step in history. On the other hand, it is also stated that the processes of nationalization, industrialization and informatization are all overlapping with each other. The question, therefore, is how to reconcile these two aspects.

In my opinion, these aspects can be reconciled by simply dividing the society into four domains of games, namely, polity, social exchange, economic exchange and organizational domains, and by examining the relationship among institutions in and across those domains.

In relation to my definition of institutions as common beliefs shared by people, I understand that the human brain is organized in modules, according to recent studies in developmental psychology and cognitive science. People use different parts of the brain, depending on whether they make choices in front of a ballot box, in the wake of terrorism, in the market, or in their organizations. I think that may be one of the reasons why we have the demarcation among academic disciplines such as political science, sociology, organizational science, economics, etc. However, even though the brain may be compartmentalized in modules, one needs to have some linkages among different modules as an individual with an integrative personality. By the same token, although in our society there are various institutions in the political, organizational, economic and communal domains, we need to have some consistent linkages among those institutions for a stable social structure. If the structure of those linkages is shaken up, a juncture point will emerge, and a variety of problems tend to occur. We can present a hypothesis, for example, that a series of unthinkable crimes and the high rate of depression and suicide among middle-aged people in present-day Japan correspond to the shaking up of institutions in Japanese society.

Going back to the Kumon hypothesis that politics, economics and communities become dominant in turn in history, I would rather think that there always exist political, economic, organizational and communal domains corresponding to political science, economics, organizational science and sociology at all times. And history evolves as institutions are formed in various domains and are interrelated with each other.

KUMON:
I do not disagree with Dr. Aoki, but it depends on which point is emphasized. It is true that we are at a juncture point of institutional change. However, there might be multiple juncture points occurring simultaneously, and we could view it as a critical turning point in civilizations, a transition point in phases in the modern society, or a switching point in phases of industrialization, signifying the next industrial revolution. Each of these interpretations makes sense, as things are complex and have multi-facets.

As Dr. Aoki pointed out, my view is somewhat like a development stage hypothesis. This is so because we cannot deny that there are sudden and concentrated developments in technology or organization in some domain in some period. Sovereign states suddenly emerged in the 16th and 17th centuries, the industrial revolution occurred in the 18th and 19th centuries, and currently, the information revolution is under way. These changes have happened in a concentrated manner, relative to other things that have also been happening at the same time. As new changes are adding to existing systems, the social structure as a whole tends to become richer, more complex and more powerful, and the total amount of energy for the society should be increasing or at least not decreasing. In this sense, my view could be interpreted as a kind of development stage hypothesis.

Mechanism for Knowledge Sharing

KUMON:
One of the characteristics of a modern sovereign state is the provision of rules for exchange and transfer of land and people that used to be considered nontransferable. In the process of industrialization, rules are set for goods and services to produce and sell as widely exchangeable and transferable "commodities" in the Marxian sense. While commodity exchange via money has a long history, modern rules such as the law of properties and the law of obligations are more abstract in nature and enable people to exchange specific properties in the private domain, rather than public properties like national land or people.

By analogy, we can expect that in the information revolution such specific services as "information and knowledge" will be actively produced and exchanged, not necessarily via money but rather by sharing with others, which I call "knowledge-sharing." I think this kind of developmental change is taking place within the framework of modern civilization.

AOKI:
I suppose it depends on technological conditions, among other things, in which domain property rights are established and whether they are recognized as transferable. In recent years, the Anglo-American approach has been dominant, where property rights should be defined for knowledge as much as possible, but more recently academics in the U.S. have begun arguing again whether it is desirable to establish property rights in the field of information.

For example, there is a famous article, "The Tragedy of the Commons" by Garret Hardin (Science, 1968), but a recent article, "The Tragedy of the Anticommons" by Michael Heller (Harvard Law Review, 1998) argues that it is not necessarily desirable to establish intellectual property rights in such upstream fields as life science. Or in the IT world, for example, there is an argument that radio waves should be auctioned for free exchange, instead of allocating certain wave bands to taxi companies, TV companies, etc., according to their vested interests. In my opinion, it is inefficient to divide radio wave bands as property rights because compression technologies are progressing rapidly, and it might be more desirable to take a "public good" approach in which radio waves are considered to be in the public domain, and can be used freely with some regulations to solve the congestion problem. In this sense, it is not a clear-cut question whether it should be treated as a public good under communal control or should be allowed to trade in the private domain. Actual practices will be more important than laws in this case, as the latter tends to confirm the former.

In Silicon Valley, property rights for innovations cannot necessarily be protected by patent arrangements, because the speed of innovation is just too fast. Nowadays, it is more common to decide how to exchange knowledge by private contracts with lawyers and maintain it by mutual trust in a communal environment.

KUMON:
I think that is a kind of direction to emerge. Although it is not predetermined in any sense, there exists a direction in history such that initially land and people were treated within the public domain under national sovereignty, then commodities have been exchanged in the domain of private properties, and in the future information and knowledge will be shared freely in a "shared" domain, which is neither the private nor the public domain. We are beginning to realize that there are possibilities about knowledge other than treating it as an object of property rights, and as a result the situation is becoming rather fluid. As is often said, knowledge does not decrease by division, and cannot be individualized as commodities. In other words, a part of knowledge cannot be independent of another part of it, but rather is closely interrelated with the whole and therefore it is difficult to say which part belongs to whom.

AOKI:
I feel that knowledge sharing can play an important role in the domain that is closely related to tacit knowledge. The history of knowledge sharing is rather old, and for example, within village communities in Japan producers shared tacit knowledge. That is uncodified knowledge. Once it is codified, it can be circulated widely and as a result communities may lose their essential identity. Scientists' communities are important because their exchange of uncodified knowledge can play a crucial role in the process of creating new knowledge. In the case of Linux, the important part is not that of sharing products, but that of sharing values in the process of improving programming successively. Communities in which people share their tacit knowledge and values can be village communities, urban communities, or communities for engineers who can interact in cyberspace. There always exist some people who share knowledge, but technology defines who they actually are.

KUMON:
Of course, that is true. In particular, I understand that there is a close relationship between tacit knowledge and communities. However, I believe that not only tacit knowledge but also codified knowledge can be shared, and in the case of codified knowledge we can understand more explicitly what we are sharing. Actually, knowledge is such that it is quite difficult to determine whether someone discovers it independently or in connection with the emergence of some other related knowledge. Suppose a certain theory is discovered by two persons separately, but its expressed contents are exactly the same. In this case we have to admit that they are the same as far as knowledge is concerned. Therefore, knowledge cannot be individualized.

AOKI:
I agree that in controlling the production of knowledge too much emphasis may be placed on patent and intellectual property rights as a result of analogy and inference from the market system. Instead, communities are emerging as an important mechanism, as Dr. Kumon says. In particular, norms or trust in professional communities and evaluations or respect among peers are becoming more important than ever in controlling the production and use of knowledge.

"Wisdom Game" to Direct Structural Reform

KUMON:
Finally, I would like to ask Dr. Aoki how to evaluate structural reform in Japan from the viewpoint of comparative institutional analysis.

AOKI:
In my opinion, institutions are not laws themselves and therefore we cannot change institutions just by making new laws. For example, the main bank system or the lifetime employment system is said to have been Japan's dominant institution in the past, but there has been no such contract as a main bank contract or a lifetime employment contract, although lifetime employment has been generally expected to hold. Laws are simply a framework for external rules to determine incentives for people, and become institutions only if they produce common beliefs shared by everyone as to how they behave in practice within the legal framework.

What is needed in Japan is to consider what kind of corporate organizations should be formed or how the production of knowledge should be organized. For that purpose, there should be various experiments in the grass roots level in the private domain, and the most effective one, possibly more than one, should be evolved and chosen. Of course, we must abolish those rules in the form of laws and regulations that hinder various experiments. However, administrative organizations themselves cannot be expected to abolish such regulations voluntarily, due to the very nature of bureaucracy whose role is to maintain their current practices. I think, therefore, political leadership is needed to change existing rules. And for our political leader to keep his commitment, voters' support will be indispensable. This way, we have come full circle to the private domain.

In summary, there should be a set of grass roots experiments and deregulation, political leadership to promote those moves, and voters' democratic choice to support it. What Japan needs most is a kind of entrepreneurial spirit for individuals to experiment with new arrangements in the organizational domain or in the communal domain.

KUMON:
One question is whether we can predict the kind of institutions in the Aoki sense that will emerge as an equilibrium out of such experiments in the next decade or two. I do not think anyone possibly could do that, but politicians have to say that we should try, although we do not know the outcome.

AOKI:
No one could predict our future institutions perfectly. Therefore, random searches would not do, and some directions are needed, when people experiment with various arrangements after a shake-up in common beliefs. It could be entrepreneur's words, a politician's leadership, or some ideas coming out of public debate or forums. Through those processes, a focal point may emerge and experiments will converge around them. In this process, political leadership and public debate play an important role.

KUMON:
That should be understood and regarded as common sense by those who advocate and administer reforms, including scholars, politicians, and bureaucrats.

AOKI:
That's right. With that in mind, my colleagues at our institute, REITI, are actively making policy proposals, just as your colleagues at GLOCOM. It would be desirable to have more forums like ours to compete for quality among themselves.

KUMON:
That is exactly what the "wisdom game" is all about.

AOKI:
I agree with you on that.

(The original Japanese version of this dialogue was published in a pamphlet "Joho Shakai Gaku o Mezashite" by GLOCOM on November 19, 2001.)