This post started out as my attempt
to understand an argument that John Wallis was making about institutions, but
it kept expanding. I’m posting it now because fall semester is approaching and
we are supposed to get the galleys for our book in the next couple of days. In
other words, I need to stop messing around with this and get to work.
Thorstein Veblen (1899)
“The institutions are, in
substance, prevalent habits of thought with respect to particular relations and
to particular functions of the individual and of the community: and the scheme
of life, which is made up of the aggregate of institutions in force at a given
point in the development of any society, may on the psychological side be
broadly characterized as a prevalent spiritual attitude, or theory of
life." (Veblen, 1953, p.131)
John R. Commons (1931) called
“collective action in control, liberation and expansion of
individual action.”
Douglass North (2005)
“institutions―formal rules,
informal norms, and their enforcement characteristics.” (North 2005, 48)
“The institutional framework
consists of the political structure that specifies the way we develop and
aggregate political choices, the property rights structure that defines the
formal economic incentives, and the social structure―norms and conventions―that
defines the informal incentives in the economy. The institutional structure
reflects the accumulated beliefs of the society over time, and change in the
institutional framework is usually an incremental process reflecting the
constraints that the past imposes on the present and the future.” (North 2005,
49).
Elinor Ostrom (2005)
"Broadly defined, institutions
are the prescriptions that humans use to organize all forms of repetitive and
structured interactions including those within families, neighborhoods,
markets, firms, sports leagues, churches, private associations, and governments
at all scales." (Ostrom 2005, 3)
Avner Greif and Christopher Kingston
(2011)
“Greif (2006, Chaps. 2 and 5)
defines an institution as a system of ‘institutional elements,’
particularly beliefs, norms, and
expectations that generate a regularity of behavior
in a social situation. These
institutional elements are exogenous to each decisionmaker
whose behavior they influence, but
endogenous to the system as a whole.”
John Joseph Wallis (2017)
“Institutions are the agreed
upon rules of human interaction within a group or an
organization and the means and
method of their enforcement. An organization can be an
organization of organizations, and
rules can apply across organizations as well as within.
Norms of behavior are
repeated patterns of human behavior within a group, no matter its
size, that occur regularly enough
that individuals form expectations about the behavior of
others. The patterns are followed
often enough that small or individual deviations do not
change expectations. All norms are
subject to change if behavior changes.
Eric Alston, Lee Alston, Bernardo
Mueller, and Tomas Nonnenmacher (2018)
“We define an institution as a rule
that recognized entities (individuals or organizations) devise and enforce.
Norms are longstanding patterns of behavior shared by a subset of people in a
society or organization (e.g, governments, firms, universities, churches, and
families.) (Alston et al 2018, 13)
Alesina and Giuliani
“we refer to culture as values and
beliefs (one could say informal rules) and to institutions as formal
institutions. (This approach is also followed in most of the empirical papers
trying to disentangle the two concepts.)”
Joel Mokyr (2017)
“Culture is a
set of beliefs, values and preferences, capable of affecting behavior, that are
socially (not genetically) transmitted and that are shared by some subset of
society.” (Mokyr 2017, 8) “Institutions are socially determined conditional
incentives and consequences to actions.” (Mokyr 2017, 9)
It is widely,
although not universally, accepted among economists that institutions are one
of the most important determinants of long-term economic growth (Acemoglu, Johnson and Robinson 2005).
But what are institutions? The definitions of institution provided by Veblen,
North, Ostrom and Greif are very broad. Institutions are ideas or beliefs that
are shared among a group of people. Some economists, however, argue that institutions
are distinct from norms and culture. They don’t argue that norms and culture
are un-important, only that for purposes of analysis they should be distinguished
from institutions. I’m not convinced that the narrower definition of
institutions is a good idea.
Are institutions agreed upon rules
but not norms?
John Wallis argues
that the “logical relationships between the agreements, rules, and enforcement
that sustain institutions are not the same as the logical relationships between
behavior, rules, and enforcement that sustain norms of behavior. By their very
nature, norms and institutions are necessarily different things.” He goes on to
explain that “A theory of institutional change cannot be a theory of everything
about human behavior. From the beginning of modern institutional social
science, the core focus has been deliberate attempts by organizations to
formulate agreed upon rules (Wallis 2017, 42).” Finally, he suggests that “If
we define institutions as norms, then it becomes too easy for some people to
compare norms and outcomes and completely ignore agreed upon rules. If we
abandon attempts to understand how changing agreed upon rules actually affect
our norms of behavior, then we will never understand how deliberately to reach
collective goals for our societies.” (Wallis 2017, 43) Wallis also notes that
agreed upon rules are often not enforced, while norms must be followed by a
sufficient number of people or they are not norms. Alston et al credit Wallis
with persuading them to distinguish between institutions and norms, although
the do not adopt exactly the same definitions.
There are common
themes in these rationales: a theory of institutions can’t be everything, formal
and informal rules are fundamentally different, the use of formal and informal
institutions is confusing, and the use of these terms leads people to
undervalue the influence of one of them.
Wallis tries to
make the case that the essential nature of agreed upon rules and norms are
different:
“With the exception
of some types of criminal activity (defined in a multitude of
ways across times and
societies), the enforcement of most agreed upon rules depends upon the people
and their relationship to which the rule may apply. As a result, observed
behavior often does not conform to the agreed upon rule.
Enforcement of norms
is probabilistic, but also automatic. If you speak, dress, or act the
wrong way, you bear
the consequences. Driving on the left in a society where the norm is
driving on the right
can get you killed. Behavioral norms only matter if there are consequences, if
there are not consequences to how we dress, we dress however we want.
Enforcement of agreed upon rules is very often optional, it depends on the
relationships supported by the rule. You and I write a contract containing a
clause that you must deliver goods at a specific time and place or incur a
penalty, a clause enforceable by a court. The time passes and you have not delivered
the goods, do I take you to court? It depends on the value of our relationship.
All of this is by way of saying that the essential nature of institutions as
agreed upon rules and norms as patterns of behavior are different.”
I think this
argument exaggerates the differences between formal (agreed upon) rules and
informal rules (norms). Wallis describes default rules like those in contract
law, or divorce law that he argues are agreed to but frequently not followed. These
are not actually example of people not following the law. Rules of this sort specify
what injured parties may do, not what they must do. If someone does not pay
their debt to me, the law says that I may try to garnish their wages; it
does not say that I must garnish their wages. But this does not mean
that garnishment law does not matter. Not using the law has been the rational
for enacting a law. Proponents of the 1898 Bankruptcy Act claimed that one of
the benefits of the law would be that people could avoid court (Hansen 1998).
After the law was enacted the use of Credit Adjustment Bureaus expanded (Hansen
and Hansen 2006 and Hansen and Hansen 2020). Choosing not to exercise your
right does not in any way undermine the law.
There are agreed
upon rule that declare what people must do rather than what they may do (they
are prescriptive rules, not default rules) that are neither followed nor
enforced. To be clear I am not talking about cases where the third party makes
a choice within the bounds of the law not to enforce; I’m talking about situations
in which there is a clear rule that is supposed to be enforced but is not (see Basu
2018). In the United States, for instance, many state and local governments did
not end official segregation until the late 1960s, long after the Supreme Court
had declared it unconstitutional (Rosenberg 2008).
So there are cases
in which agreed upon rules are not followed and not enforced, but there are
also cases in which norms are not followed or enforced? There is evidence that
people frequently follow the norms of their society regarding things such as fairness,
trust and cooperation (see Pseudoerasmus on pro-social institutions). But
both ethnographic and experimental research find that norms are not always
followed. Ellickson famously documented that people in Shasta County tend to
follow norms rather than the law in dealing with stray cattle, but he also found
that the norms were not always followed. Wiessner (2005) found numerous cases of punishment
for norm violation among the Ju/’hoansi Bushmen, implying that there were numerous
cases of norm violation. There is evidence
that people are frequently willing to incur costs to punish people that violate
social norms when dealing with them (Henrich et al), that third parties are
also willing to incur costs to punish norm violators (Fehr and Fischbacher
2004), and that people also engage in anti-social punishment (Hermann et al
2008). Other studies suggest that enforcement of norms may be influenced by the
severity of the violation, the cost of punishment, the circumstances under
which the violation takes place (existence of mitigating circumstances), the
identity of the norm violator, and the identity of the person injured by the
norm violation. In general, people appear to respond to benefits and costs
(including retaliation) of norm enforcement (Przepiorka and Berger 2016; Balafoutas
and Nikiforakis 2012). The Ju/’hoansi Bushmen appear to have been particularly sensitive
to the threat that punishment posed to ongoing relationships. In sum, enforcement
of norms is not automatic, and, like agreed upon rules, enforcement can depend
on relationships.
Proponents of a
more restrictive definition of institutions also tend to argue that norms are stickier,
harder to change, and change more slowly than institutions. Again, I don’t
think the evidence on this is entirely clear. There is some evidence that norms
are not only subject to policy influence but capable of rapid change (Nyborg et
al 2016). As mentioned previously, it took more than a decade to end state enforced
school segregation. In my own research it took 100 years to obtain a lasting
federal bankruptcy law in the United States; the 1898 Bankruptcy Act alone took
nearly twenty years of organized lobbying. In contrast, social norms regarding
women in the work force, marriage, and sexual preference have changed quite rapidly.
Understanding, social norms can potentially increase the ability to promote
change in them (Bicchieri 2016)
I am not arguing
that we cannot distinguish between agreed upon rules and norms. I’m arguing
that we should not exaggerate the differences between them. Nevertheless, it is
possible to distinguish between agreed upon rules and norms. It is not clear,
however, that this distinction is going to take us far in developing a general
theory of institutions. Whatever, you call them there is a lot of variation
within each of these two categories. We
can develop theories that explain Congressional activity, the relationship between
federal and state legislation, judicial decision making, or the interaction
between legislative and judicial activity. We have a variety of theories for
these different situations, but is it reasonable to expect a general theory to
cover all of them? How much less likely is it that this general theory will
also help us to understand changes in agreed upon rules in Canada, Israel,
Switzerland, China, Burundi, Venezuela and Saudi Arabia? Can we develop a
single theory that goes beyond some basic statement about individuals balancing
the costs and benefits of attempting to change institutions given the set of
institutions for changing institutions that they face?
Social norms are
similarly variable. We tend to emphasize prosocial norms because of their
connection to economic development, but there are plenty of norms that
negatively affect well-being: female genital mutilation, racism, sexism, etc. People
follow norms for a variety of reasons. There are beneficial and harmful formal
rules that people follow or don’t follow for a variety of reasons. They follow
norms because they are in their self-interest narrowly conceived; they follow
them because they have internalized the values associated with them; they
follow them because they fear punishment by others, including supernatural
beings. But all of these things are true of formal rules as well.
Are institutions formal rules
but not culture.
Several of the
definitions at the beginning of this post distinguish betwen institutions and culture.
Alesina and Giuliano, for example, state that “Semantically speaking, we find
it counterproductive and confusing to label culture (meaning values and
beliefs) as informal institutions. We find it confusing to label
“everything”—from, say, the level of reciprocal trust in a society to
constitutional rules about voting systems—as institutions. Clearly—this is the
crux of our paper—culture (or informal institutions) and formal institutions
are interrelated, but the label “informal institutions”
implies that formal institutions determine informal ones and that the latter
are of secondary importance. Once we agree that formal and informal
institutions interact, and that either one may cause the other, then
identifying certain values and beliefs as culture or informal institutions
becomes merely a matter of semantics. We prefer the term culture over informal
institutions; we find it more appropriate and less confusing. Similarly, for
brevity, we sometimes refer to formal institutions simply as institutions.”
Parts of this
argument simply do not make sense to me. For instance, Alesina and Giuliano believe
that “the label “informal institutions” implies that formal institutions
determine informal ones and that the latter are of secondary importance.” How
does the label informal imply that it determines formal, thereby rendering of
secondary importance? Notice also this appears to be the opposite of Wallis’s
suggestion that “If we define institutions as norms, then it becomes too easy
for some people to compare norms and outcomes and completely ignore agreed upon
rules.” Alesina and Giuliano suggest that political economists will fail to
study informal rules, while Wallis suggests they will fail to study formal
rules. Neither claim is supported.
What about the
bigger issue of distinguishing between institutions and culture? The central problem
with these attempts to separate institutions from culture is that it is
inconsistent with the definitions of culture and the way the term is used by people
working on cultural evolution.
Mokyr, for
instance, relies upon Boyd and Richerson, but Boyd and Richerson do not treat
institutions as separate from culture. In Boyd and Richerson (2008, 306) they follow
Samuel Bowles definition of institutions as: “the laws, informal rules, and
conventions that give durable structure to social interactions in a
population.” They explicitly describe how the sort of “agreed upon rules” that
Wallis emphasizes are a part of an evolving culture:
Cultural evolution
can also amortize slow, costly deliberate, conscious decisions
over many
individuals. In law, for example, legislators, lawyers, and
judges expend much
effort crafting legislation and interpreting it. To the extent
that they are
successful, the entire society benefits. Most of us do not need to
participate in the
costly process of legal decision making; we merely need to
know something of
the laws that apply to us. Indeed, to the extent that everyday
mores and the
formal law coevolve, individuals can acquire useful behaviors
economically by
quite unconsciously imitating the behavior they see around
them. In this way,
culture is analogous to habit formation in individuals. Variants
that were invented
by deliberate reasoning and carried to dominance by
formal collective
decision making may be acquired by subsequent generations
through unreflective
imitation (Boyd and Richerson, 2008, 307).
Indeed, if one considers Boyd and
Richerson’s definition of culture as “a set of beliefs, values and preferences,
capable of affecting behavior, that are socially (not genetically) transmitted
and that are shared by some subset of society” it is hard to see how you could argue
that it does not fit formal rules such as laws.
Back to Veblen
Veblen had the
broadest definition of institutions. In his first book, The Theory of The
Leisure Class (1899), he explained that, "The institutions are, in
substance, prevalent habits of thought with respect to particular relations and
to particular functions of the individual and of the community: and the scheme
of life, which is made up of the aggregate of institutions in force at a given
point in the development of any society, may on the psychological side be
broadly characterized as a prevalent spiritual attitude, or theory of
life." (Veblen 1912, 190) Veblen explicitly defined both as ideas that
were shared by a group of people. “The physical properties of the materials
accessible to man are constants; it is the human agent that changes-- his
insight and appreciation of what these things can be used for is what develops (Veblen
1919, 71).” Consequently, “the evolution of society is substantially a process
of mental adaption on the part of individuals under the stress of circumstances
which will no longer tolerate habits of thought formed under and conforming to
circumstances in the past." (Veblen 1912, 192)
To Veblen this process
of mental adaptation should be the central concern of economists: “To any
modern scientist interested in economic phenomenon the chain of cause and
effect in which any given phase of human culture is involved as well as the
cumulative changes wrought in the fabric of
human conduct itself by the habitual activity of mankind, are matters of
more engrossing and abiding interest than the method of inference by which an
individual is presumed invariably to balance pleasure and pain under given
conditions that are presumed to be normal and invariable (Veblen 1919, 240).”
Veblen’s
conception of institutions is the most consistent with the definitions of
culture developed by people working on cultural evolution, and largely adopted
by economists. Individual institutions, shared habits of thought correspond to memes
or cultural elements (Mesoudi 2017). His “scheme of life” is essentially synonymous
with culture, at least as it is used by some anthropologists. For instance, Richard
Dunham suggests that “culture consists of shared ideational phenomena (values,
ideas, beliefs, and the like) in the minds of human beings. It refers to a
pooled body or “pool” of information that is both public (socially shared) and
prescriptive (in the sense of actually or potentially guiding behavior) (Durham
1991, 3).” And “the new consensus in anthropology regards cultures as systems
of symbolically encoded conceptual phenomena that are socially and historically
transmitted within and between populations.” (Durham 1991, 8) Henrich, defines
culture as “the large body of practices, techniques, heuristics, tools,
motivations values, and beliefs that we all acquire while growing up, mostly by
learning from other people (Henrich 2016, 3).” But this view of culture isn’t
isolated to anthropologists who study the coevolution of genes and culture. The
cultural anthropologist Eric Gable also describes culture as “ideas and their embodiment
in artifacts and activities (Gable 2011, 6).” Like Veblen’s definitions of
institutions and scheme of life these definitions of culture are very broad and
emphasize the role of shared ideas that are transmitted over time within a
society. These definitions of culture include not just norms, but also legal
and political institutions and technology. They include the influence of shared
ideas on both the objectives that people deem worthy and the means to achieve
those objectives.
The definitions
provided by North, Ostrom and Grief are like Veblen’s in defining institutions
in terms of shared ideas or beliefs. Because of the emphasis on “rules” it is
not clear that they are quite as broad as Veblen. Although the rules of games
do not just tell people what they can and can’t do; they also tell you what you
should want to do. Modern institutional analysis, especially that reflected in
the work of North from Structure and Change in 1981 to Understanding
the Process of Economic Change in 2005, seemed to be moving toward a Veblen
like approach. Institutions are shared ideas that influence human behavior.
Pulling formal
rules out of culture creates two problems. First, to the extent that culture is
defined in terms of ideas that are shared by members of a society, both at a
point in time and over time, formal (agreed upon rules) fit within this
definition. Unlike norms they agreed upon, written down, and not actually known
to everyone. But these things are true of religion, science, and technology as
well are these not part of our culture? In my reading of Henrich, the fact that
because of culture not all of us have to carry all of the knowledge in our
heads is the secret of our success.
Second, terms like
“scheme of life” and “culture” tend to suggest that, while we can study
particular institutions or memes, they add up to something that can also be
considered as a whole. “When we use the word “culture,” we are generally
referring to a system of meanings, a system of ideas, present in a myriad of human
actions, form the most mundane to the most exalted (Gable 2011, 8)”. Pulling
institutions out of culture leaves us without a concept for all the socially
shared information and assumes away the possibility that the whole is more than
the sum of the parts. It is not clear to me that this makes sense. Rosen (2006)
makes an interesting case for viewing law as part of a culture. For instance, he
notes that what counts as evidence in a court (trial by ordeal or DNA?) is not
something that is separate from a society. Were coverture and Jim Crow laws not
part of American culture? In our work, we find that bankruptcy laws and their
use have evolved in response to interest group activity but also in response to
changing beliefs about debt and failure (Hansen and Hansen 2020).
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