The “world’s economy” is a confusing term often described in terms such as “globalized”, “interconnected” or “free”. Stepping one level lower, economists often compare economies based on “Gross Domestic Product”, in order to determine the two “P’s” and the two “D’s”: profitable versus poor and developed versus developing. But underneath all of the economic activity and the invisible market forces, there are “institutions”, which stand to measure, regulate, and facilitate economic growth.
In the book Institutions and the Economy, Francesco Duina explains the seemingly ambiguous term “institution”, and he explores the various functions of economic institutions in the world’s economy. Duina explains institutions as they are understood from a sociological perspective, the impact of institutions on individuals and larger groups of people, and the challenges that institutions faces from the outside and within.
What are institutions?
Institutions have been around for centuries and are a fundamental asset to civilized life. However, the word “institution” was rarely used beyond the most recent two hundred years. During the Renaissance as the academic world began to open up and explore various new disciplines such as Economics, Political Science, and Sociology, the term became increasingly useful.
“Institution” is used to describe a wide variety of functions depending on the person you ask, but Duina explains that “…virtually all scholars agree on at least two aspects of institutions: institutions are fairly stable entities (i.e., if they change at all they typically do so slowly), and institutions exert some sort of influence on actors in society…”(22). To summarize, institutions are stable and exert influence.
Duina notes the important distinction, stability, amongst institutions because, “They stand in contrast to other spaces in society, such as networks of friends”(22). And perhaps the most surprising and important variance in Duina’s theory is the following distinguishment: organizations in the economy are entities that are heavily influenced by the rules and traditions set forth by institutions, but they are not institutions themselves (22).
He provides numerous specific examples of institutions, such as the notion of property rights (49) and the failure of Enron (88), but all the while repeating that the impact of institutions “…is multifold and varied. Sometimes they are intimately and causally connected to the economic reality we observe. At other times, they provide the broader context in which economic activity unfolds”(60). This overarching influence of institutions is especially present at the nation-state level. Both formal institutions, such as intimately written laws, and informal institutions, such as the tradition of a 9AM to 5PM work-day, significantly dictate day-to-day life.
Laws and traditions exist, but so what? Why do participants in society follow them? Interestingly, Duina goes as far as to comment on the reasoning for which institutions are created and then perpetuated into infinity: isomorphism. The idea of isomorphism “…refers to the fact that widespread conformity to certain models and myths produces organizations that look and behave alike”(88).
Through coercion, entities are forced by dominating institutions to follow a certain code of behavior or face penalties. For example, city governments impose parking fines if you park a vehicle in the wrong spot.
In moments when rules are not clear and uncertainty weighs heavily into decision-making, mimetic desire applies. Rene Girard believes this is why Christianity remains the world’s most popular religion.
Finally, normative isomorphism simply describes a continuation of the status quo; meaning that some entities in society take certain actions not necessarily because they are required, but instead because they are motivated out of habit and social acceptance. Peter Thiel believes this is the root cause for a widespread belief in college education in America.
Thus, the power of institutions is conformity. An organization’s decision to conform depends on how vulnerable it is to issues of legitimacy.
Organizations that produce products or services that are vaguely defined (such as the college that I attend, Wake Forest) may need to do more to establish their legitimacy compared to those that produce more recognized outputs. Hence the abundant evidence of this type of behavior on the homepage of the Wake Forest website, where the school is described as “…consistently ranked among the top 30 universities in the nation.”. This description exists to reassure uneasy visitors of Wake Forest’s legitimacy.
Despite a continuous dominance of institutions in all facets of life, they are especially vulnerable to change. The interconnected nature of the economy is such that almost any change in institutions at the nation-state level is bound to have a far-reaching rippling effect. For example, the idea of the Western nation-state, one that has an “…education system which is secular and universal, offering instruction in scientific, humanistic, and artistic disciplines” is constantly under fire from religious radicals. Furthermore, an increasing homogenization of cultures throughout the world provides an efficient basis for grouping and organizing economic activity, but also threatens to preserve centuries-old institutions that cannot compete on an economic basis.
Finally, I am personally most looking forward to tracking the challenges that are faced by institutions which stand to exist independently of other institutions, such as the cryptocurrency Bitcoin. Is it right that all money has to be legitimized by some sort of governing agency? Or can economic activity sustain and thrive outside of formal institutions? Will experiments in alternatives to college and alternative currencies offer a path to reconsider the role of institutions? I am interested to find out.