What are institutions?

Author:Hodgson, Geoffrey M.

The use of the term institution has become widespread in the social sciences in recent years, reflecting the growth in institutional economics and the use of the institution concept in several other disciplines, including philosophy, sociology, politics, and geography. The term has a long history of usage in the social sciences, dating back at least to Giambattista Vico in his Scienza Nuova of 1725. However, even today, there is no unanimity in the definition of this concept.

Furthermore, endless disputes over the definitions of key terms such as institution and organization have led some writers to give up matters of definition and to propose getting down somehow to practical matters instead. But it is not possible to carry out any empirical or theoretical analysis of how institutions or organizations work without having some adequate conception of what an institution or an organization is.

This paper proposes that those that give up are acting in haste; potentially consensual definitions of these terms are possible, once we overcome a few obstacles and difficulties in the way. It is also important to avoid some biases in the study of institutions, where institutions and characteristics of a particular type are overgeneralized to the set of institutions as a whole. This paper outlines some dangers with regard to an excessive relative stress on self-organization and agent-insensitive institutions.

This paper draws on insights from several academic disciplines and is organized in six sections. The first three sections are devoted to the definition and understanding of institutions in general terms. The first section explores the meaning of key terms such as institution, convention, and rule. The second discusses some general issues concerning how institutions function and how they interact with individual agents, their habits, and their beliefs. The third examines the difference between organizations and institutions and what may be meant by the term formal when applied to institutions or rules, by focusing on some of Douglass North's statements on these themes. The fourth identifies an excessive bias in the discussion of institutions toward those of the self-organizing type, showing theoretically that these are a special case. The fifth argues that institutions also differ with regard to their degree of sensitivity to changes in the personalities of the agents involved. Finally, the sixth concludes the essay.

On Institutions, Conventions, and Rules

Institutions are the kinds of structures that matter most in the social realm: they make up the stuff of social life. The increasing acknowledgement of the role of institutions in social life involves the recognition that much of human interaction and activity is structured in terms of overt or implicit rules. Without doing much violence to the relevant literature, we may define institutions as systems of established and prevalent social rules that structure social interactions. (1) Language, money, law, systems of weights and measures, table manners, and firms (and other organizations) are thus all institutions.

Following Robert Sugden (1986), John Searle (1995), and others, we may usefully define a convention as a particular instance of an institutional rule. For example, all countries have traffic rules, but it is a matter of (arbitrary) convention whether the rule is to drive on the left or on the right. So in regard to the (say) British institutional system of traffic rules, the specific convention is to drive on the left. (2)

At some stage we need to consider how institutions structure social interactions and in what senses they are established and embedded. In part, the durability of institutions stems from the fact that they can usefully create stable expectations of the behavior of others. Generally, institutions enable ordered thought, expectation, and action by imposing form and consistency on human activities. They depend upon the thoughts and activities of individuals but are not reducible to them.

Institutions both constrain and enable behavior. The existence of rules implies constraints. However, such a constraint can open up possibilities: it may enable choices and actions that otherwise would not exist. For example: the rules of language allow us to communicate; traffic rules help traffic to flow more easily and safely; the rule of law can increase personal safety. Regulation is not always the antithesis of freedom; it can be its ally.

As Alan Wells (1970, 3) put it, "Social institutions form an element in a more general concept, known as social structure." The original institutional economists, in the tradition of Thorstein Veblen and John R. Commons, understood institutions as a special type of social structure with the potential to change agents, including changes to their purposes or preferences.

However, some institutionalists such as John Fagg Foster (1981,908) have misleadingly defined institutions as "prescribed patterns of correlated behavior." (3) Defining institutions as behavior would mislead us into presuming that institutions no longer existed if their associated behaviors were interrupted. Does the British monarchy cease to exist when the members of the royal family are all asleep and no royal ceremony is taking place? Of course not: royal prerogatives and powers remain, even when they are not enacted. It is these powers, not the behaviors themselves, which mean that the institution exists. Nevertheless, such powers may lapse, and institutional dispositions may fade, if they are not exercised with sufficient frequency. Furthermore, the only way in which we can observe institutions is through manifest behavior. (4)

Not all social structures are institutions. Social structures include sets of relations that may not be codified in discourse, such as demographic structures in animal species or in human societies before any understanding of demography. Demographic structures may limit social potentialities in terms of the number of infants or elderly requiring care and the number of able-bodied adults available to care, produce, and procreate. But they do not necessarily do this through the operation of rules. (5)

The term rule is broadly understood as a socially transmitted and customary normative injunction or immanently normative disposition, that in circumstances X do Y. (6) A prohibition rule would involve a large class of actions Y, from which the prohibited outcomes are excluded. Other rules may involve requirements to perform a smaller class of actions in Y. A rule may be considered, acknowledged, or followed without much thought. The phrase immanently normative requires that if the rule is scrutinized or contested, then normative issues will emerge.

The term socially transmitted means that the replication of such rules depends upon a developed social culture and some use of language. Such dispositions do not appear simply as a result of inherited genes or instincts; they depend upon contingent social structures and may have no direct or obvious representation in our genetic make-up.

Rules include norms of behavior and social conventions as well as legal rules. Such rules are potentially codifiable. Members of the relevant community share tacit or explicit knowledge of these rules. This criterion of codifiability is important because it means that breaches of the rule can be identified explicitly. It also helps to define the community that shares and understands the rules involved.

The normative aspect of a rule would not be so relevant, and would have no compelling reason to be passed on from generation to generation, if physical and natural circumstances allowed only one option Y* in circumstances X. If we were compelled by the laws of nature to do Y* in circumstances X, then there would be no need for normative compulsions or sanctions. In contrast, multiple options can typically be imagined for the form of a rule. One culture may uphold in circumstances X do Y; another may require in circumstances X do Z. Nevertheless, the laws of nature constrain the set of possible rules that may be formulated. A feasible rule cannot ask us to defy the laws of gravity or to become Julius Caesar. The set of possible rules can be enlarged by technological and other institutional developments. For example, the technology of writing makes feasible the rule that a valid contract on paper must be signed. (7)

As Searle (1995, 2005) has argued, the mental representations of an institution or its rules are partly constitutive of that institution, since an institution can exist only if people have particular and related beliefs and mental attitudes. Hence an institution is a special type of social structure that involves potentially codifiable and (evidently or immanently) normative rules of interpretation and behavior. Some of these rules concern commonly accepted tokens or meanings, as is obviously the case with money or language. However, as Max Weber pointed out in 1907, some rules are followed "without any subjective formulation in thought of the 'rule'" (1978, 105). For example, few of us could specify fully the grammatical rules of the language that we use regularly or completely specify in detail some practical skills. Nevertheless, institutional rules are in principle codifiable, so that breaches of these rules can become subjects of discourse.

Even with this criterion of potential codifiability, a problem arises as to how far we can stretch the meaning of the term rule in the definition of an institution. Friedrich Hayek (1973, 11), for example, emphasized that "[m]an is as much a rule-following animal as a purpose-seeking one." However, his notion of a rule was extremely broad. For Hayek (1967, 67) the term rule is "used for a statement by which a regularity of the conduct of individuals can be described, irrespective of whether such a rule is 'known' to the individuals in any other sense than they normally act in accordance...

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