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Path Dependence In Evolution Of Irish Insolvency Politics Essay

The argument that institutional change is characterized by path dependence has appeared in economics (North 1990, 2005), political science (Pierson 2002), sociology (Mahoney 2000), and law (Bebchuk and Roe 1999; and Hathaway 2001). Many social scientists in these disciplines believe that path dependence is the key to answering fundamental questions about institutions, including questions about how institutions evolve over time and why institutions sometimes persist even when they seem to have negative consequences for economic growth, political participation, or justice.

This paper assesses the utility and validity of path dependency in the context of Irish insolvency laws

This paper examines the legislative history of bankruptcy reform in Ireland over the last two hundred years. We present an explanation for the evolution of Irish insolvency law by portraying as David (1985) points out, how “one damn thing follows another”. The mainstay of our thesis is that laws and the legal system are predisposed to evolution along a certain path (Hathaway, 2001) and thus provides us with a useful conceptual framework for our analysis. We propose that insolvency laws and the institutions that evolve with them – professional insolvency firms – are highly susceptible to path dependent evolution. This can lead to inflexibility and resistance to change as initial moves along a certain path produce increasing returns and feedback mechanisms Pierson (2004), which act to reinforce the chosen path, making alternative paths decreasingly likely.

This argument is especially pertinent to the evolution of the law and particularly with regard to the tradition of common law. We argue that the early bankruptcy Acts have a decisive impact on current bankruptcy and insolvency laws. Once institutionalized these laws gain legitimacy through cultural acceptance and through survival over several generations. This cycle of reinforcement makes change difficult in several ways. Firstly, a major part of our legal system relies on case law which is built on hundreds of thousands of court judgments and places principal importance on the merit of precedent, or “stare decisis” (Byrne and McCutcheon, 2001: 5, 324). The doctrine of stare decisis has the effect of making the law particularly retrospective, in adhering to previously made decisions. Secondly

Hathaway (2001) provides an in-depth examination of how the common law system is predisposed to evolution along a certain path once departing from some arbitrary initial condition, from which point there existed multiple equilibria and where evolution toward each equilibrium was as likely as the other.

We now present an overview of the theory of path dependence, the main contributors to the field of study and the different approaches adopted by different academic disciplines.

It is culture that provides the key to path dependence - a term used to describe the powerful influence of the past on the present and future. The current learning of any generation takes place within the context of the perceptions derived from collective learning. Learning then is an incremental process filtered by the culture of a society which determines the perceived pay-offs, but there is no guarantee that the cumulative past experience of a society will necessarily fit them to solve new problems. Societies that get "stuck" embody belief systems and institutions that fail to confront and solve new problems of societal complexity. (Douglas North’ nobel prize acceptance speech)

Path dependence

Over the last two decades path dependence has been used increasingly in social-scientific debates about institutional evolution (Crouch and Farrell, 2004). Academics from a range of disciplines have employed this approach in attempting to explain “institutional stickiness”, or why individuals often fail to respond to environmental changes even when doing so would lead to a better outcome. (North, 1990a; Pierson, 2000a, b; Putnam, 1993; Thelen, 1999). Path dependence has also been taken on by legal scholars like Hathaway (2001) to describe the course and pattern of change in the common law system, and Hanson and Hanson (2005) use this approach to in their discussion on the “role of path dependence in the development of U.S. bankruptcy law”.

While the basic concept of path dependence is generally accepted to mean “that an outcome or decision is shaped in specific and systematic ways by the historical path leading to it”(Hathaway, 2001: 105-104). Some academics however have argued that the widespread adaptation of the idea of path dependence has “dulled its value” (Page, 2006) and that the over use of the concept of “history matters” (North, 1995) has rendered path dependency theory devoid of any analytical benefit (Raadschelders 1998) and merely allows academics to “trace outcomes back to temporally remote causes” (Mahoney, 2000). While concurring that this perspective is too broad, Pierson (2004) argues that there is useful explanatory power in viewing path dependence as a self-reinforcing mechanism when it generates increasing returns.

There is no single unified theory of path dependency and it has enjoyed a controversial career among economists, legal historians, political scientists and sociologists

Even from this short introduction it is clear that there is much contestation about defining the meaning of the term “path dependence” and its application to a variety of different theoretical problems. David (1997) claims that the term “has come to be

invoked more frequently than it is defined”, while Kay argues that path dependence is not a theory at al but, rather a theoretical concept; “a concept which can be used to label a certain type of temporal process” (Kay, 2003: 406)

For the purpose of clarification, we present in the next section a short review or synthesis of some of the major contributions from academics who have attempted to resolve this problem.

And even though there appears to be a range of disparate attempts to place path dependence within particular frameworks, there exists a large degree of overlap between the different approaches and the differences are only subtle.

To begin, it is difficult to argue with North’s claim that “[T]oday's and tomorrow's choices are shaped by the past”, but how and why this is the case is still an ongoing debate. Institutional theorists have provided us with useful insights into the evolution of modern institutional forms, but as Goldstone (1998) points out, much of this theorising is too deterministic and

Many authors have attempted placing path dependence within a framework for analysis of specific theoretical problems, but there is still no conclusive definition and overlap between different approaches highlights, often, only subtle differences. In the economics literature path dependency emerged in opposition to neo-classical economics claims of evolution towards efficiency, or towards one unique equilibrium state. Nelson and Winter (1982) in their seminal book “An evolutionary theory of economic change” went against the grain of orthodox economics when they posited that certain forces can lead to inefficient outcomes or multiple equilibria and that in order to get beyond the territory of general equilibrium theory, economists will have to deal with “aspects of economic reality that are repressed” within the theory (Nelson & Winter, 1982: 5). In a not entirely uncontroversial article, David (1985) claims that the QWERTY keyboard system is not the most optimum typing system, but became the dominant standard by initial advantages gained in part at least, by the timing of its arrival. David (1985) described three different reasons which caused the QWERTY system to become “locked-in”, which can be simply stated as exhibiting properties of increasing returns. This has been the topic of the most influential works from the economics discipline with Arthurs (1995) and Pierson’s (2000) books being those most regularly cited. Scholars of corporate governance, Bebchuck & Roe (1999) and Roe (1998) have made convincing arguments that the organisations and corporate structures that survive aren’t the necessarily the “fittest”. This approach borrows from the evolutionary theory of Charles Darwin and provides very useful insights on organisational understanding. However this approach is not entirely unproblematic, as Goldstone (1998) elucidates, Darwinian evolutionary theory rules out certain evolutionary paths because of the way in which the transmission of particular traits is a result of reproduction. Societies on the other hand, like bacteria, are Lamarckian, in that they have the ability to learn or acquire new traits which allows them to adapt to environmental changes. So according to Goldstone, Darwinian evolution is governed by a set of invariant laws and that to be a useful approach to the study of evolution in social science that it needs to be combined with a sensitivity to the “effect of initial conditions and the role of contingent events in altering those conditions over time” (Goldstone, 1989:837, referring to Gould, 1983; 1989)

Path Dependence in Historical Sociology

Mahoney, 2001; Goldstone, 1998 ; Griffin, 1993 ;

Economic historians and path dependence

Economic historians and rational choice theorists have argued more abstractly that path

dependence stems from a series of mechanisms that “lock in” actors to a particular developmental path (e.g., Arthur 1994; David 1985; North 1990). In his insightful article on the QWERTY system David (1985), was one of the first to discuss how the concept of increasing returns caused the standard to become “locked-in”.

Organisational theorists and path dependence

Some argue that such evolutionary change occurs through a process known as path dependence in which apparently small or insignificant events or decisions result in an organizational or institutional change that persists over long periods of time and that limits the range of options available to actors in the future (e.g., Clemens 1997, p. 58-59, 237; Davis and McAdam 2000, p. 216; Guthrie 1999, p. 85; North 1990, pp. 93-95; Powell 1991, p. 192; Roe 1996; see also Stinchcombe 1968, pp. 101-118). [Campbell, 2002: 17]

Path dependence in politics

Economic historians and rational choice theorists have argued more abstractly that path

dependence stems from a series of mechanisms that “lock in” actors to a particular developmental path (e.g., Arthur 1994; David 1985; North 1990). Applying this approach to politics, Paul Pierson (2000a, 2000b) has argued that path dependence occurs as a result of several feedback mechanisms through which actors gain increasing returns for behaving in ways that are consistent with how they have acted in the past and, therefore, encourage them to behave similarly in the future. [Campbell, 2002: 18]

Point of departure

Critical Juncture??

“The theory further suggests that the opportunities for significant legal change in a common law system are brief and intermittent, occurring during critical junctures when new legal issues arise or higher courts or legislatures intercede. Moreover, it leads to the unsettling conclusion that the order in which cases arrive in the courts can significantly affect the specific legal doctrine that ultimately results.” (Hathaway, 2001: 105). The end of the nineteenth century appears to have been such a critical juncture in bankruptcy laws (Skeel, 1998). There are two significant factors which impacted upon the path of the law around this time; (1) the widespread availability of consumer credit and other financial innovations, such as

The common law tradition and the doctrine of stare decisis

The Irish legal system belongs to a family of legal systems known as common law systems. The original common law system was established in England after the Norman conquest which began 1066. Ireland was the second country to be conquered by the Normans about 100 years later in 1169 and thus provided for the common law’s “first adventure” outside of England (Johnston, 1920. Cited in Byrne and McCutcheon, 2001). Prior to the Anglo-Norman conquest Ireland was governed by ancient early Irish laws commonly know referred to as brehon laws. These two distinct legal systems – brehon law and common law – cohabited within Ireland for centuries (Osborough, 1999: 17), and over the years the distinction between the two systems became blurred until brehon law was eventually expunged in the early 17th century (Byrne and McCutcheon, 2001: 7) when Irish Chiefs O’Neill and O’Donnell were defeated by the English in the Nine Years War. This lead to the flight of the earls in 1607 and the consequent end of Gaelic rule in Ireland.

Sources of law

The common law system is built on a body case of law which is based on centuries of judgments made by court judges. According to Byrne and McCutcheon (2001: 5) the law enjoys binding force through the doctrine of precedent which is made up of vast thousands of decisions which have allowed common law to evolve into a coherent body of law. This doctrine of precedent is known as stare decisis and it is one of the main features of the common law system. Stare decisis, or Stare decisis et non quieta movere "Maintain what has been decided and do not alter that which has been established", is one of the major distinguishing features between common and civil law. The lack of a textual basis of an authoritative code means that lawyers in the common law system have recourse to a large body of case law, which has been built upon so many cases and evolved over so many years that it’s “correctness is now beyond dispute and can be considered the principal rule of judicial decision making in common law systems” (Byrne and McCutcheon, 2001: 324).

Path dependency and the common law

There are striking insights to be garnered from applying a theory of path dependency to the law, one of the these insights leads us to the troubling conclusion that early court resolutions of legal issues can become locked-in and resistant to change (Hathaway, 2001: 105). Continuing on Hathaway posits that the doctrine of stare decisis that is central to our common law system creates and explicitly path-dependent process. The past forms the point of departure for the present. The present, in turn, forms the point of departure for the future” (Hathaway, 2001: 163)

In Ireland the reserved judgments of the High Court, Supreme Court and the Court of Criminal Appeal make up the most significant body of case law (O’Malley, 2001: 69).

Evolution of US insolvency laws

The US shares the same common law tradition as Ireland which it inherited from England during the time of the revolutionary war, but the two countries have developed very different insolvency laws each with its own particular political dynamics (Berglof and Rosenthal, 2001; Franks and Sussman, 2005)

In America current bankruptcy legislation has evolved very differently from bankruptcy legislation in many European civil law and German law countries. The U.S. railroad receiverships of the late 1800’s and especially the case of the Wabash railroad receivership are considered critical events in the evolution of U.S. Bankruptcy laws (Franks and Sussman, 2005; Martin, 1974). The Wabash railroad was the first case of a railroad applying to the courts for protection from creditors and requesting that managers of the company be appointed receivers. Justification for the judicial intervention is given by the commonly held view that debt contracts often fail to internalise all the benefits of maintain a company as a going concern and that violation of the creditors rights would serve the public good (Franks and Sussman, 2005). The significance of the revolutionary Wabash decision to relegate private property and take into account the rights of shareholders which were not written into debt contracts provided a catalyst for institutional change in the American political economy (Martin, 1974).

The case of the Wabash railroad company was remarkable in many respects. Martin (1974) referring to an article in the Harvard Law Review in 1896 by D.H. Chamberlain, wrote that ‘No one – not the state nor any creditor – except for this “delinquent corporation” was before the court’, and yet the very management that got the corporation into difficulty in the first place had been appointed receivers by the court. This was a decision that Chamberlain, a leading authority on receiverships, felt could be used by “unscrupulous manipulators” to use courts to gain favourable decisions to reduce creditor’s rights. But despite of the criticism of the courts decision in favour of the Wabash reorganization proposal, the Wabash case is the foundation of railroad bankruptcy law to this day (Martin, 1974). Indeed this decision laid the foundations for the application of the equity receivership to small business when Chapter 11 reorganisations were introduced under the Chandler Act 1938.

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