Institutional economics is an approach that recognizes the importance of culture. This is an exploration of the question of how central culture is for institutionalist theory. The strategy for this exploration is to begin outside of institutionalist theory with the aim of reconstructing a theory of culture and to consider whether the process brings us closer to an institutionalist theory. The argument is that, for the specific cases examined where it is, in some sense, possible to reconstruct a theory of culture, the process does indeed bring us into contact with institutionalist theory. Recognition of the importance of culture is, therefore, more than a stance of institutionalist practitioners--it appears to be an intrinsic facet of institutionalist theory.
The original point of departure for this journey was provided by Robert Posner (1995), in the chapter in his book Overcoming Law where he addressed the overlap and conflicts between the economics and law and new institutional "movements." In introducing the new institutional economics, Posner acknowledged that an older institutional economics once existed. He even went so far as to acknowledge that it continues to exist, though one gains the distinct impression that this continued existence is for no clear reason and certainly should excite no further interest. But of course his backhanded acknowledgment of actual institutional economics is not why this effort by Posner provides the point of departure for this argument.
Posner's take on new institutional economics is a version of the well-rehearsed "new and true" critique--that most of what is valuable and presented as new in new institutional economics is a restatement of standard applied economics in new terms. For example, he asked, "Does 'bounded rationality' ... mean anything more than that economic actors have and must (rationally) act on less than full information?" (1995, 435)--and then eventually answers this query in the negative:
The biggest gulf between the two movements arises from the new institutionalists' skeptical attitude toward rational utility maximisation. Coase rejects this cornerstone of modern economic theory--he has called it "meaningless"--yet at the same time says that his own approach is guided by the assumption that people prefer more to less. So if I am offered a choice between 3 and 2, I will prefer 3. But what if I have another opportunity, worth 4? Then I will prefer it.... And so on--until I have maximised my utility. (441-442) Here is the first element of my point of departure, because here Posner demonstrated his unit of analysis. Obviously not all of out actions are preceded by an evaluation. The standard response to this is that if acting without choice led to persistent biases, there would be gains available from making more evaluations, until the result would be "as if" all actions were preceded by an evaluation, with a random, unbiased error term added. Under bounded rationality (Coase 1984), one does not always gain an advantage by making a selection from alternatives, so this "as if" argument is invalid. Since Posner only enquired as to what bounded rationality would yield when a choice is made from alternatives, it is clear that his unit of analysis is a selection from alternatives followed by performance. This is the exact unit of analysis that leaves the user blind to the difference between bounded rationality and utility maximization under incomplete information.
The second element in my point of departure is Posner's argument that "[w]e should be pragmatic about theory. It is a tool, rather than a glimpse of absolute truth, and the criterion of a tool is its utility" (1995, 431). If we attempt to apply Posner's unit of analysis to the reconstruction of culture, the effort is futile. If this reconstruction of culture is in some sense an essential task, then the pragmatic response is to insist on having another tool available.
In this day and age there ought to be no reason to belabor the point, but, clearly, a full-fledged theory of the economy should be capable of a reconstruction of its concept of culture. In the Graduate School of Business where I work, we teach courses in cross-cultural marketing and cross-cultural management. The same is true of the undergraduate programs at the main campus. The same is true in business schools across Australia. The same must be true of business schools in Europe, since, for example, our textbook in cross-cultural marketing is a European edition (Usunier 1999).
Business educators think that their students must be exposed to the challenges that will face them if they cross cultural boundaries in their careers. An approach to economics that cannot use its theory to explain culture is therefore placing itself in a subordinate position regarding an important aspect of the economy. Under the pragmatic criterion sponsored by Posner, such an approach is not an adequate tool to grasp the whole economy.
Can culture be explained simply on the basis of choosing the preferred alternative from an available menu? How do we define culture? Our current cross-cultural marketing text launches with a discussion of a variety of definitions of culture, including the following discussion:
According to Goodenough (1971), culture is a set of beliefs or standards, shared by a group of people, which help the individual decide what is, what can be, how to feel, what to do, and how to go about doing it. On the basis of this definition there is no reason for culture to be equated with the whole of one particular society. It may be more related to activities that are shared by a particular group of people. Thus individuals may share different cultures with different groups. When in a particular cultural situation, they will "switch into" the culture that is operational. The term "operational" describes a culture that is shared by those among whom there must be co-operation and that is suitable for the task (Usunier 1999).
If our unit of analysis is selection followed by performance, then when culture directs action, this must be either in the form of a constraint on the selection or in terms of the preferences that the individual has. However, when we turn to the question of how the concept of culture can be reconstructed, this leads to immediate problems. If culture acts as a binding constraint, then when given an opportunity to select a more binding or a less binding constraint, utility maximization says to pick the less binding constraint. Therefore, it would always make sense for culture as a set of constraints to fade away. And if it always makes sense for culture to fade away, it is unclear how it ever came to exist in the first place.
The situation becomes no better if culture is simply incorporated into the preferences of the individual. In effect, this subordinates rational choice as nothing but the mechanism implementing a culture. The logical problem is that if preferences are opened up as one of the selections to be made, and selections are always made by applying preferences to available alternatives, we have created an infinite regress. Neither way of incorporating culture permits this unit of analysis to explain culture. If we wish to have an approach that is able to explain the whole of the economy, we must look elsewhere.
In his argument that new concepts of new institutional economics are neologisms for existing concepts of ordinary applied economics, Posner argued that "[t]he increasing use of game theory to develop these themes comes out of--game theory, rather than out of anything special to new institutional economics" (1995, 436). The natural unit of analysis in game theory is strategy selection, followed by interaction. Clearly, from the perspective of Posner's unit of analysis, this is just another variety of selection from alternatives followed by performance. However, as Posner's unit of analysis is inadequate to the task at hand, there is no need to stay with it.
Therefore, we leave Posner behind and begin to pass through an aspect of new institutional economics itself. Here the material will be found to...