What is an Institution?

Giambattista Vico

Now, since this world of nations has been made by men, let us see in what institutions all men agree an always have agreed. For these institutions will be able to give us the universal and eternal principles (such as every science must have) on which all nations were founded and still preserve themselves. . . .

Giambattista Vico, one of the first to use the word “institution”

The word “institution” is thrown around a lot in the social sciences. The term has a long history of use and there is still no unanimity in its definition. Unfortunately, this creates a lot of confusion when people use the word, as they rarely define it clearly. For example, when one talks about institutions, are they referring to practices, rules, norms, or organizations? How do institutions influence behavior? It questions like these that come up all the time when I read books by various scholars, especially economists. I too have been guilty of this, so I’m writing this post to clarify a very important concept that I invoke, and will continue to use, in many of my posts. I’m not claiming that this definition is original (1) or all encompassing, but it’s a very useful starting point.

Broadly speaking, institutions are systems of established and prevalent social rules that structure social interactions (Hodgson 2006: 2). This definition encompasses many different objects and behaviors, e.g. language, money, law, firms, and even table manners. While the existence of a rule implies a constraint of some sort, this isn’t always the case. As John Searle points out:

The essential role of human institutions and the purpose of having institutions is not to constrain people as such, but, rather, to create new sorts of power relationships. Human institutions are, above all, enabling, because they create power, but it is a special kind of power. It is the power that is marked by such terms as: rights, duties, obligations, authorizations, permissions, empowerments, requirements, and certifications. (Searle 2005: 10)

For example, the rules of language enable us to communicate. Money enables us to exchange without barter.

Alan Wells writes, “Social institutions form an element in a more general concept, known as social structure.” At it’s most basic level, a social structure is an organized pattern of social relationships that compose society. These structures are emergent phenomenon that influence the behavior of agents and are influenced by the actions of those agents. Institutions are a certain type of social structure in that they specifically operate through rules, i.e a socially transmitted (2) norm or a “customary normative injunction”. This point is important because there are a lot of social structures, such as demographics, that are not institutions because they don’t affect behavior through the operations of rules. These things are still important, but they are not institutions and shouldn’t be confused as such.

These rules include a number of behaviors and conventions and are codifiable:

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. (Hodgson 2006: 3)

It was this relationship between social structures, institutions, and individuals that was recognized by several old institutional economists (mostly in the Veblenian tradition). These economists could pinpoint the mechanisms involved that gave institutions their bite. Put differently, old institutional economists understood how institutions worked, through operational rules that are embedded in habits. See this passage from Thorstein Veblen:

This apparatus of ways and means available for the pursuit of whatever may be worth seeking is, substantially all, a matter of tradition out of the past, a legacy of habits of thought accumulated through the experience of past generations. So that the manner, and in a great degree the measure, in which the instinctive ends of life are worked out under any given cultural situation is somewhat closely conditioned by these elements of habit, which so fall into shape as an accepted scheme of life. The instinctive proclivities are essentially simple and look directly to the attainment of some concrete objective end; but in detail the ends so sought are many and diverse, and the ways and means by which they may be sought are similarly diverse and various, involving endless recourse to expedients, adaptations, and concessive adjustment between several proclivities that are all sufficiently urgent. (Veblen 1914: 7)

Veblen clearly understood that the acquisition of habits is the psychological mechanism that creates the basis of (much) rule-following behavior.

By constraining and enabling individual behavior, institutions mold and change the behavior of agents in fundamental ways. Habits are the key mechanisms in this process of conformity and transformation. You can also think of habits as the “materials” that make up institutions, providing them with durability and normative legitimacy. Institutions are social structures that involve a downward causation, acting upon individual habits of thought. Of course, this doesn’t mean that the habit-driven behavior of agents is some deterministic process that denies free will. The existence of downward causation doesn’t mean that institutions uniformly determine individual motives and aspirations. All this means is that institutions have important downward effects that should be looked at when we analyze human behavior. As I mentioned in my previous post on old institutional economics, most old institutional economists, e.g Veblen, thought that human preferences were shaped by institutions and institutions are the outcomes of individual behavior. In other words, causation ran both ways.

So why does this matter? I refer back to a famous quote by Thorstein Veblen on the “economic man”:

The hedonistic conception of man is that of a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated, definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-imposed in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him, whereupon he follows the line of the resultant. When the force of the impact is spent, he comes to rest, a self-contained globule of desire as before.

Not much has changed since Veblen wrote this. While assumptions about the “rational economic agent” may be useful in a specific context (for isolating variables and such), they are extremely limiting when applying these models in the real world. In order to truly understand how man acts within an economic context, and by extension how key economic variables interact with each other, we need to study how institutions influence behavior and incorporate that into economic models.

Although the word institution will continue to be used indiscriminately, I hope this provided some clarification on the original question at hand. I don’t expect all (or many for that matter) to agree with this particular definition, as there are always details to be disputed and sentences to be nitpicked. But at the very least, there can be some sort of common ground when it comes to using a word that is thrown around way too often.


Notes:

1. This definition is essentially the definition that is provided by Geoffrey Hodgson (Hodgson 2006) and John Searle (Searle 2005).

2. By socially transmitted, I mean that the replication of rules depends upon the use of some language and a developed social culture (Hodgson 2006: 3)

References:

1. Hodgson, Geoffrey M. “What Are Institutions?” Journal of Economic Issues XL.1 (2006): 1-25. Print.

2. Hodgson, G. “Reclaiming Habit for Institutional Economics.” Journal of Economic Psychology 25.5 (2004): 651-60. Print.

3. Hodgson, Geoffrey Martin. Economics and Institutions: A Manifesto for a Modern Institutional Economics. Philadelphia: University of Pennsylvania, 1988. Print.

4. Lane, Jan-Erik, and Svante O. Ersson. The New Institutional Politics: Outcomes and Consequences. London: Routledge, 1999. Print.

5. Searle, John R. “What Is an Institutions?” Journal of Institutional Economics 1 (2005): 1-22. Print.

6. Veblen, Thorstein. The Instincts of Worksmanship and the State of the Industrial Arts. New York: Viking, 1914. Print.

7. Veblen, Thorstein. 1898A. Why is economics not an evolutionary science? Quarterly Journal of Economics, vol. 12, no. 3, July, 373-97.

Advertisements

4 Comments

Filed under Economics, Home

4 responses to “What is an Institution?

  1. Blue Aurora

    Do you plan on eventually reading Acemoglu and Robinson’s Why Nations Fail?

  2. Pingback: Advocates of Reason: 18 November 2013 | Economic Thought

  3. Pingback: Abusing History, Exhibit I: Margaret Sanger and Eugenics | Irrepressible Thought

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s