Foundations of Neo-institutional Theory

We have arrived at the point in our history when the ideas that have come to be recognized as neoinstitutional theory appeared. As we will see, they do not represent a sharp break with the past, although there are new emphases and insights. In this section, I review the proximate sources and founding conceptions linking neoinstitutional theory to organizational analysis in the mainstream disciplines of economics, political science, and sociology as well as in the related fields of cogni- tive psychology and cultural anthropology. Then, in Chapter 3, I attempt a more analytic synthesis of current conceptual approaches, noting areas of consensus and dispute.

1. Neoinstitutional Theory in Economics

Many diverse lines of work contribute to the mixture of ideas fueling neoinstitutional theory in economics. It is instructive, and rather ironic, that the newer economic work “reflects less the ideas of the early insti- tutionalists than it does those of their opponents” (Langlois 1986a: 2). Most neoinstitutional economists do not seek to replace orthodox eco- nomic theory with the study of multiple and diverse institutional condi- tions, but rather to develop an economic theory of institutions.

In his useful review, Langlois (1986a) incorporates within neoinsti- tutional economics the contributions of Simon (discussed earlier); a focus on transaction cost and property rights inspired by Coase (1937), with a slight nod to Commons; the modern Austrian school as influ- enced by Hayek (1948); the work of Schumpeter (1926/1961) on inno- vation; and evolutionary theory as developed by Nelson and Winter (1982). Three more or less common themes underlie and link these contributions (see Knudsen 1993; Langlois 1986a):

  1. A broader conception of the economic agent is embraced, replacing the assumption of maximizing within a set of known alternatives.

How broad a view is taken varies greatly among the identified schools. In his work on transaction costs, Williamson embraces Simon’s conception of “bounded” rationality, while the Austrian and evolution- ary theorists utilize an even more expansive view that includes rule- based or “procedural” rationality (behavior is rational if specified procedures are followed, irrespective of outcome).

  1. A focus on the study of economic processes rather than on the purely logical study of equilibrium states is preferred, fostering a recognition that economic systems evolve over time reflecting, in part, learning by the agents.

Conventional economics devotes the lion’s share of its resources to the study of various types of economic systems that have attained an equilibrium (stable and well-coordinated behavior), but little to the question of how a state of equilibrium came into being or comes apart. Often, ad hoc stories are generated about how stability may have been achieved, but these are only tacked on to the formal model (see Knudsen 1993). Neoinstitutional economists, by contrast, are interested in developing and testing these process arguments. Rather than treat- ing institutions mainly as exogenous variables affecting economic behavior, the newer scholarship considers how institutions affecting economic transactions arise, are maintained, and are transformed. Game theorists have also become interested in these questions, asking how norms or rules emerge as actors interact to devise treaties or regimes to deal with conflicts.

  1. The coordination of economic activity is not simply a matter of market-mediated transactions, but involves many other types of institutional structures that are, in themselves, important topics of study.

In addition to the role of governmental systems, among the most important of these institutional structures are those embedded in organizations.

It is not possible here to consider in detail all of the specific approaches associated with these themes (for reviews, see Hodgson 1993; 1994; Mäki, Gustafsson, and Knudsen 1993; Silverman 2002; Zajac and Westphal 2002), but four of the more influential contributions will be briefly described.

Transaction Cost Economics

One branch of neoinstitutional economics is concerned with the rule and governance systems that develop to regulate or manage eco- nomic exchanges. These systems occur at many levels, from macro regimes at the international level to understandings governing micro exchanges between individuals. Accounting for the emergence and change of trading regimes among societies has been of primary inter- est to economic historians (e.g., North 1990), industry systems have been examined by industrial organization economists (e.g., Stigler 1968), and studies of the sources of organizational forms are being con- ducted by a growing set of organizational economists (see Milgrom and Roberts, 1992). While all of this work is properly regarded as institutional economics, it is the latter work, focusing on firm- and corporate-level structures, that is especially identified with the new institutionalism in economics.

By consensus, the pioneer theorist inaugurating this approach was Ronald Coase (1937), whose article “The Nature of the Firm” asks why some economic exchanges are carried out within firms under a gover- nance structure involving rules and hierarchical enforcement mecha- nisms rather than being directly subject to the price mechanism in markets. Coase suggests that the reason must be that “there is a cost of using the price mechanism,” namely “the costs of negotiating and con- cluding a separate contract for each exchange transaction which takes place in a market” (p. 389). It is because of these transaction costs that firms arise.

This insight lay fallow—in Coase’s (1972: 69) own words, his arti- cle was “much cited and little used”—until it was resurrected in the 1970s by Oliver Williamson, who pursued its development by both conditionalizing and elaborating it. Williamson argued that transaction costs increase as a function of two paired conditions: when individual rationality, which is “bounded” (cognitively limited), is confronted by heightened complexity and uncertainty, and when opportunism— some actors’ propensity to lie and cheat—is coupled with the absence of alternative exchange partners. Under such conditions, exchanges are likely to be removed from the market and brought within an organiza- tional framework or, if already inside an organization, to stimulate the development of more elaborate controls (Williamson 1975; 1985). Williamson extends Coase’s arguments by pushing them beyond the market versus firm comparison to consider a wide variety of alterna- tive governance systems ranging from markets, to hybrid organiza- tional forms (e.g., franchising or alliance arrangements), to various types of hierarchical structures (e.g., unified firms, multidivisional corporations) (Williamson 1985; 1991).6 In this approach, Williamson builds on the previous work of Barnard (1938), who emphasized adap- tation as a central problem facing organizations; Simon (1945/1997), with his conception of bounded rationality and organizational strategies for supporting decision making; and Chandler (1962), with his focus on matching a firm’s structure to its strategy (Williamson 2005).

Thus, the Williamson variant of new institutional economics focuses primarily on the meso-analytic questions of “the comparative efficacy with which alternative generic forms of governance—markets, hybrids, hierarchies—economize on transactions costs” rather than on the more macro questions regarding the origins and effects of the “institutional rules of the game: customs, laws, politics” (Williamson 1991: 269)—the latter issues being left to economic historians and soci- ologists (see also Williamson 1994; 2005).

Although Williamson stretches conventional economics to take seriously the effects of varying institutional contexts, or governance structures, on economic behavior, unlike earlier economic institutional- ists, he has remained firmly within the neoclassical tradition. Hodgson (1994) underlines the point:

Like the work of other new institutionalists, Williamson’s is con- structed in atomistic and individualistic terms because its elemental conceptual building block is the given, “opportunistic” individual. He does not consider the possibility that the preference functions of the individual may be molded by circumstances, such as the struc- ture and culture of the firm, or that this phenomenon may be sig- nificant in analyzing or understanding such institutions. (p. 70)

In addition, Williamson shows little interest in the processes by which varying governance structures arise or are transformed. His explanation for a structure is more often constructed as a functionalist one, “explaining” the choice of a given form by pointing to its conse- quences (Knudsen 1993; see also Chapter 5).

By contrast, other economists, such as Douglass North, have devel- oped approaches that incorporate assumptions much more similar to those embraced by the turn-of-the-century economic institutionalists. As noted, North focuses on a higher level of analysis, examining the origins of cultural, political, and legal frameworks and their effects on economic forms and processes. As an economic historian, his focus is on development and change rather than on comparative statics (North 1989; 1990; see also Chapter 5). And while he attends to transaction costs in his analysis of economic systems, he is more prone to treat them as dependent variables—subject to the effects of varying wider institutional frameworks—than as independent variables to explain differences among actors’ choice of governance mechanisms (see Hirsch and Lounsbury 1996).

Whereas Williamson (1994: 79) focuses attention on organizations as themselves institutional forms—governance systems devised to reduce transaction costs—that must take into account “background conditions” such as property rights, laws, norms and conventions, North (1990: 5) directs attention to these wider institutional frame- works—societal “rules of the game”—and views organizations as “players” who are attempting to devise strategies to win the game.

Game-Theoretic Approaches

Game theory is an important branch of the economic rational choice perspective that views institutions as an equilibrium phenom- enon. Game theory examines situations in which individuals behave strategically in the sense that each person’s outcomes depend on the choices made by other players. Games comprise sets of rules specify- ing the players (decision makers), their possible actions, and each player’s preferences about outcomes. The objective is for each player to maximize her outcomes given the actions of other players. An equi- librium condition is reached when the behaviors of players are “self- reinforcing”—each player selecting a consistent option given her knowledge of how other players will behave. Games may support more than one equilibrium solution so that the testing of specific pre- dictions may not be possible (Gibbons 1992). Economists and rational choice political scientists have modeled many types of game settings.

Elinor Ostrom has employed a game-theoric approach to examine a variety of institutional frameworks, focusing primarily on the “rules- in-use” in “action situations,” including the regulation of the phone industry in the United States, the evolution of coffee cooperatives in Cameroon, the performance of housing condominiums in South Korea, and a comparison of nonprofit, for profit, and government day care centers in the United States (Ostrom 2005: 9, 138). She and her col- leagues have devised an Institutional Analysis and Development (IAD) framework that focuses principally on (1) rules—“shared understand- ing by participants about enforced prescriptions concerning what actions (or outcomes) are required, prohibited, or permitted” (Ostrom 2005: 18)—but also attends to (2) the attributes of goods, such as whether they are easily divisible, transferable, or excludable, and (3) to the attributes of community, which include its culture, or the values shared within a community (Kiser and Ostrom 1982; Ostrom 2005). The framework is applied to action situations that include attention to the attributes of participants, positions, and actions of the actors involved. In short, the approach broadens and enriches mainstream game theory.7

Ostrom’s attention to rule systems as the heart of institutional analysis recognizes that these systems operate at multiple levels. Her work stresses three as particularly important: operational rules that affect day-to-day decisions of participants in the setting, collective-choice rules that determine who is eligible to participate in decisions and which rules are to apply in changing situation, and constitutional-choice rules that lay out the deeper level frameworks specifying the capabilities and limits of the repertories of rules available (Ostrom 2005: 58–62). These frameworks have been employed to compare and contrast actions and outcomes not only in formal models and experimental simulations but also in examining rule-framed choice situations in a wide variety of qualitative field studies in diverse social and cultural settings.

Institutional scholars, such as Avner Greif (2006: 14), have embraced and adapted game-theoretic approaches because, rather than treating institutions as frameworks of rules or beliefs, they treat these as elements that help to “constitute the structure that influences behavior, while the behavioral responses of agents to this structure reproduce the institu- tion.” Greif points out that many rules are not obeyed; many beliefs do not affect the behavior of those who profess them. Thus, it is preferable to focus on

endogenous institutions: those that are self-enforcing. In self- enforcing institutions all motivation is endogenously provided. Each individual, responding to the institutional elements implied by others’ behavior and expected behavior, behaves in a manner that contributes to enabling, guiding, and motivating others to behave in the manner that led to the institutional elements that generated the individual’s behavior to begin with. (pp. 15–16)

These types of institutions persist, unless there is exogenous change, because “the behavior of each actor is optimal, given the behavior and expected behavior of the other actors” (Greif 2003: 150). Such situations are of particular interest to economists because many equilibria are likely to exist: “What we observe does not have to be optimal and survival does not indicate efficiency” (Greif 2003: 150). In this manner, game theory offers a framework for examining the insti- tutional foundations of markets from an equilibrium, rather than opti- mality perspective.

Greif is open to non-economic influences on choice behavior. The actor’s motivations may stem from numerous influences, including many sociocultural attributes, including norms, beliefs, and cognitive ingredients. Because motivations vary greatly, “rational” decisions contribute to diverse choices among individuals of “optimal’ outcomes.

Greif applies his approach to a variety of historical cases focusing on the institutional conditions contributing to or inhibiting economic development in the European and Muslim portions of the Mediterra- nean of the medieval period. In related work, Nee and Lian (1994) have utilized similar approaches to examine differences between the former Soviet Union and China in the emergence of the market economies. The former relied primarily on formal, top-down approaches, which have been far less successful than China’s bottom-up incrementalist strategy, more closely tied to the interests of participating political and economic actors.

Evolutionary Economics

A third, important addition to neoinstitutional economic theory has been developed by Nelson and Winter (1982; Winter 1964). Their evolutionary approach distantly echoes the interests of Veblen, but is more solidly based on Schumpeter’s (1926/1961) ideas on innovation and Alchian’s (1950) arguments that economic agents such as firms are subject to adaptation and selection processes (Winter 2005). Nelson and Winter embrace an evolutionary theory of the firm analogous to biological models, in which a firm’s routines are argued to be the equivalent of genes in a plant or animal. Routines—or capabilities—are made up of both the conscious and tacit knowledge and skills held by participants who carry out organizational tasks. To survive, a firm must be able to reproduce and modify its routines in the face of chang- ing situations.

Nelson and Winter (1982: 36) locate their arguments at the indus- try or organizational population level of analysis in order to develop a theory of economic change processes. Their concern is to examine the ways in which competitive processes operate among firms so that those whose routines are best adapted to current conditions flourish while those with less adequate routines falter. A dynamic model of accumulating knowledge and capabilities is developed to displace the static model of orthodox economics. Firms are viewed as historical entities, their routines being “the result of an endoge- nous, experience-based learning process” (Knudsen 1995b: 203). Moreover,

it is quite inappropriate to conceive of firm behavior in terms of deliberate choice from a broad menu of alternatives that some external observer considers to be “available” opportunities for the organization. The menu is not broad, but narrow and idiosyncratic; it is built into the firm’s routines, and most of the “choosing” is also accomplished automatically by those routines. (Nelson and Winter 1982: 134)

Nelson and Winter do not employ the term institution in their argu- ments, but it is quite clear that their conception of organizational routines can be treated as one mode of institutionalized behavior. Implicitly, as Langlois (1986a: 19) suggests, their view of institution is one of “regularities of behavior understandable in terms of rules, norms, and routines.” Nelson and Winter embrace a much broader conception of factors shaping behavior and structure in organizations than do transaction cost economists. Also, their approach strongly favors a process orientation rather than one of comparative statics.

Resource-Based Theory

Whereas evolutionary approaches emphasize the power of exoge- nous forces such as variation, selection, and retention processes, resource-based theory stresses the possibility of organizational actors to strategically manage resources under their control. The level of analysis shifts from the organization population to the firm level.

This approach to the examination of organizations was pioneered by Edith Penrose (1959/1995), who recognized that the most important asset a firm possesses is its specialized use of resources (including worker skills) and its capacity to mobilize them, as required, in diverse combinations. More recently, this conception has been advanced and elaborated by scholars such as Jay Barney (1991) and David Teece (1982). Barney and colleagues argue that a firm’s “resources and capa- bilities can be viewed as bundles of tangible and intangible assets, including a firm’s management skills, its organizational processes and routines, and the information and knowledge it controls” (Barney, Wright, and Ketchen 2001: 643). A firm’s competitive advantages “derive from the resources and capabilities a firm controls that are valuable, rare, imperfectly imitable, and not substitutable” (p. 643). This view contrasts with neoclassical economic arguments that assume that factors (resources) are elastic in supply, readily available if the price is right. Resource-based theorists insist that some resources are not elastic, developing over long periods of time, difficult to reproduce because based on tacit knowledge, their value dependent on linkages to complex constellations of other variables.

Both Barney and Teece argue that managerial skills are critical to building, maintaining, and modifying firm capabilities. Managers of firms operating in rapidly changing environments must master the skill of designing dynamic capabilities: sensing and shaping opportuni- ties and threats, enhancing and reconfiguring the firm’s intangible and tangible assets.

Dynamic capabilities include difficult-to-replicate enterprise capa- bilities required to adapt to changing customer and technological opportunities. They also embrace the enterprise’s capacity to shape the ecosystem it occupies, develop new products and pro- cesses, and design and implement viable business models. (Teece 2009: 4)

Resource-based scholars recognize the existence and importance of institutionalized elements within organizations, and point out the chal- lenges these pose for organizational leaders: to nurture existing capa- bilities and to design and implement new institutional structures to meet changing challenges and opportunities.

In sum, there are important differences among contemporary insti- tutional economists in the nature of their assumptions and the focus of their analytic attention. However, it is unquestionably the case that the new institutional economics is dominated currently by scholars who cling to the neoclassical core of the discipline while struggling to broaden its boundaries.

2. Neoinstitutional Theory in Political Science

As described in Chapter 1, neoinstitutionalism in political science may be viewed, at least in part, as a reaction to the behavioralist emphasis that dominated the field up through the mid-20th century. Resembling to some extent the situation in economics, the new insti- tutionalists in political science and political sociology have grouped themselves into two quite distinct camps: the historical and the ratio- nal choice theorists.8 The two perspectives differ along several dimensions.

Historical Institutionalism

The historical institutionalists, in many respects, hearken back to the turn-of-the-century institutional scholars who devoted themselves to the detailed analysis of regimes and governance mechanisms but also reflect the influence of Weber and his comparative approach as well as more recent sociocultural approaches (Lecours 2005; Thelen 1999). On the one hand, we find the more “materialist” approaches that focus attention on governance structures: electoral rules, party systems, relations between branches of government (e.g., Hall 1986; Steinmo, Thelen, and Longstreth 1992). Thelen and Steinmo (1992: 2), for exam- ple, view institutions as “both formal structures and informal rules and procedures that structure conduct.” On the other side, some theorists adopt a more normative or ideational approach focusing on beliefs, values, and cognitive scripts (e.g., Finnemore 1993; March and Olsen 1984; 1989).

Although these differences exist, most historical institutionalists focus on the nature of political systems, examining the ways in which these structures shape the character and outcomes of conflicts— how they distribute power among actors and shape actors’ conceptions of their interests (Hall and Taylor 1996). They emphasize that political institutions are not entirely derivative from other social structures such as class, but have independent effects on social phenomena (Evans, Rueschemeyer, and Skocpol 1985); that social arrangements are not only or even primarily the result of aggregating individual choices and actions; that many structures and outcomes are not those planned or intended, but the consequence of unanticipated effects and constrained choice; and that history is not usually “efficient”—a process “that moves rapidly to a unique solution” (March and Olsen 1984: 737)—but one that is much more indeterminate and context-dependent.

Some members of the historical group take a social-constructionist position that assumes “that capabilities and preferences, that is, the very nature of the actors, cannot be understood except as part of some larger institutional framework” (Krasner 1988: 72; see also Chapter 3). Individual preferences are not stable and often result from rather than precede or determine choices. Institutions construct actors and define their available modes of action; they constrain behavior, but they also empower it. Analysis from this perspective is aimed at providing a detailed account of the specifics of institutional forms since they are expected to exert strong effects on individual behavior: structuring agendas, attention, preferences, and modes of acting.

These analysts attempt to show that political systems are not neu- tral arenas within which external interests compete, but rather complex forms and forums that generate independent interests and advantages and whose rules and procedures exert important effects on whatever business is being transacted. In accounting for the origins of these structures, the approach is primarily that of historical reconstruction. Although individuals build these structures, there is no assurance that they will produce what they intend. Current choices and possibilities are constrained and conditioned by past choices (see, e.g., Ertman 1997; Karl 1997; Skowronek 1982). Institutions, once established, have a “continuing effect on subsequent decision-making and institution- building episodes” (Campbell 2004: 25).

These insights have been derived from and applied to a wide variety of political systems, including private associations, nation- states, international organizations, and regimes such as monetary and trade agreements (e.g., Finnemore 1993; Keohane 1989; Schmitter and Lehmbruch 1979; Skowronek 1982). Critics point out that the work is too often historicist, focusing too much on the details of a single, complex case.

Rational Choice Theory

The second camp consists of the rational choice theorists (also termed “positive” theorists) and includes such scholars as Moe, Shepsle, and Weingast. These analysts view institutions as governance or rule systems, but argue that they represent deliberately constructed edifices established by individuals seeking to promote or protect their interests. The approach represents an extension of the neoinstitutional work in economics—including the transaction cost approach of Williamson and the work of agency theorists such as Alchian and Demsetz (1972)—and its application to the study of political systems. Tullock (1976: 5), an early advocate of importing economic models to explain political behavior, argues that “voters and customers are essen- tially the same people. Mr. Smith buys and votes; he is the same man in the supermarket and the voting booth” (see also Buchanan and Tullock 1962). Moe (1984) enumerates the major elements making up the paradigm adopted from the economists as including

the contractual nature of organizations; markets vs. hierarchies, transactions costs, the rationality of structure, individualistic explanation, and economic methods of analysis. Standard neoclas- sical notions—optimization, marginality, equilibrium—are often central to work in this new tradition. (p. 750)

Political theorists recognize that economic models developed to account for economic organizations require modification if they are to be applied to political systems (Pierson 2004: 30–48). But they also insist that many of the basic questions are parallel: Why do public organizations exist? How are we to account for their varying forms and governance mechanisms? How can elected political officials, as “prin- cipals,” control their bureaucratic “agents”? What are the effects of political institutions on political and social behavior? What are the mechanisms by which politicians secure their power positions? As Peters (1999: 45) observes, “Within this approach institutions are con- ceptualized largely as sets of positive (inducements) and negative (rules) motivations for individuals, with individual utility maximiza- tion providing the dynamic for behavior within the models.”

Rational choice theorists recognize that “in the reality of politics social choices are not chaotic. They are quite stable” (Moe 1990a: 216). They are stable because “of the distinctive role that institutions play” (Moe, 1990a: 216). Many early scholars argued that much of the stabil- ity observed in the law-making process could be explained by the ways in which the rules of procedure and committee structures of legisla- tures structured the choices available to members (Ferejohn and Fiorina 1975; Riker 1980). Thus, the task becomes to understand the role of institutions and, “more fundamentally, to determine where these institutions come from in the first place” (Moe 1990a: 216). The general argument embraced by these theorists is that “economic orga- nizations and institutions are explained in the same way: They are structures that emerge and take the specific form they do because they solve collective-action problems and thereby facilitate gains from trade” (Moe 1990a: 217–218).

Theorists disagree as to what is distinctive about political institu- tions. Weingast (1989) argues that politics differs from markets in that in the former, actors cannot simply engage in market exchange but must make decisions under some framework such as majority rule. Shepsle (1989) suggests that the most important task of political sys- tems is to “get property rights right”: to establish rule systems that will promote efficient economic organizations. Moe (1990a: 221) argues that political decisions are distinctive in that they are “fundamentally about the exercise of public authority,” which entails access to unique coer- cive powers. Pierson (2004: 38) adds that politics is “a far, far murkier environment” than the economic realm, lacking “the measuring rod of price” and entailing the pursuit of often incommensurable goals with opaque processes. These and related researchers have attempted to account for the distinctive powers and influential procedures of congres- sional committees (Shepsle and Weingast 1987) and the performance (including the ineffectiveness) of some governmental bureaucracies (Moe 1990a; 1990b) as rational solutions to collective problems (see Chapter 5). Hall and Taylor (1996: 945) observe that one of the principal contributions of this approach has been to draw our attention to the crucial “role of strategic interaction in the determination of political outcomes” and to provide a set of tools for understanding how institu- tions structure such interaction.

An important arena of application for both historical and rational choice theorists has been that of international relations. Rational mod- els view nation-states as self-interested actors attempting to maximize their own advantage in dealing with other nations. Rules are accepted when they lower the transaction costs of a participant and/or decrease the overall level of uncertainty (Hasenclever, Mayer, and Rittberger 1997; Rittberger 1993). By contrast, historical institutionalists, such as Krasner (1983) and Keohane (1989), emphasize the important indepen- dent effects of the emergence of cooperative norms among participating nations. In addition, as Keohane (1989: 382) points out, “institutions do not merely reflect the preferences and power of the units constituting them; the institutions themselves shape those preferences and that power.”

In sum, while both historical institutionalists and rational choice theorists agree on the importance of institutions in political life, important differences in assumptions and perspectives remain. Ratio- nal choice theorists are more likely to stress the microfoundations of institutions, asking how institutions are devised to solve collective action problems experienced by individuals. Historical institutional- ists are more likely to emphasize a macro perspective, tracing the evolution of an institutional form and asking how it affects individual preferences and behavior. Preferences are more likely to be treated by rational choice theorists as stable properties of actors, while for his- torical institutionalists, preferences are seen to be more problematic, emergent from the situation (endogenous), and context-specific. And the two camps are attracted to different sets of problems. Historical institutionalists “begin with empirical puzzles that emerge from observed events or comparisons”; rational choice theorists are more likely to be attracted to “situations in which observed behavior appears to deviate from what the general theory predicts” (Thelen 1999: 374). Finally, rational choice theorists give central place to the concept of equilibria and view institutions as central mechanisms in sustaining this condition, whereas historical institutionalists—like their 19th century counterparts—are more interested in historical change than in equilibrium—the factors producing political and eco- nomic change broadly viewed as “structured institutional change” (see Orren and Skowronek 1994).

Thelen (1999) cites evidence of convergence in the perspectives of the two camps in recent years, and Scharpf (1997) suggests that each approach is incomplete and proposes that in the long run they can be combined into a more complete explanation. At the present time, however, they remain relatively distinct approaches, more independent than overlapping in perspective and assumptions and more competitive than cooperative in demeanor.

3. Cognitive Psychology and Cultural Anthropology

Cognitive Theory

Simon’s work on decision making in organizations paralleled developments in social psychology, as this field of study—both its psy- chological and sociological sides—experienced the “cognitive revolu- tion.” During the 1940s and 1950s, the stimulus-response (S-R) approach began to be revised to include attention to the participation of an active organism (S-O-R) that mediated between the provocation and the reac- tion (see Lewin 1951). Early research concentrated on how the state of the organism, as defined by various motivational and emotional vari- ables, affected perception, selective attention, and memory. An early concern with “hot” cognition (for example, anger or fear) began to be superseded by attention to the effects of “cool” factors (such as atten- tion and background assumptions) influencing everyday information processing and problem-solving behaviors.

The idea of the human organism as an information processor became popular. The mind came to be viewed by many as a com- puterlike apparatus that registered the incoming information and then subjected it to a variety of transformations before ordering a response. (Markus and Zajonc 1985: 141)

The question became: What types of “software” provide the pro- grams and transformation rules for these processes? Such factors ranged from the functioning of the brain and nervous system to the structure of individual cognitive processes. Early social theorists, like Durkheim, insisted that “the framework of the intelligence” was entirely provided by the forms of the society into which an individual was born: Social and cultural forms determine mental models (collec- tive representations). This argument, with variations, has been echoed and elaborated by Mead, Parsons, and Bourdieu, among numerous others, up to the present time (Bergesen 2004). However, a large and growing body of psychological theory and research suggests that rather than providing a blank slate, humans (e.g., unsocialized infants) come equipped with a number of fundamental mental capabilities, such as conceptions of space, number, cause and effect relations, and recognition of categories (see Gopnik, Melzoff, and Kuhl 1999; Mehler and Dupoux 1994). In a related development, Chomsky (1986) has convinced most linguists that “the principles of language [syntax] are not learned but part of our bio-endowment” (Bergesen 2000: 73).9

Yet another debate concerns whether individual thought processes follow a logical axis involving abstract reasoning (“computational”) model or a “pattern recognition” (“connectionist”) model—the noting of similarities and differences in the situations encountered. The latter approach appears to be both more consistent with studies of human learning and better suited to explaining the ways in which social/ economic actors cope with the kinds of uncertainties they encounter (North 2005: 27). Related work points out that when similarities are encountered, they trigger preexisting “scripts”—a structure that describes appropriate sequences of actions in a well-known situation (Shank and Abelson 1977: 41).

Psychologists have long vacillated between positions that regard indi- viduals as basically competent, rational beings and views emphasizing cognitive biases and limitations. The general impact of recent cognitive theory and research has been to emphasize the shortcomings of indi- viduals as information processors and decision makers. Tversky and Kahneman (1974) pioneered in the identification of a number of specific types of biases likely to cause mistakes in assessing information and reaching conclusions. These and related problems were generalized by Nisbett and Ross (1980) into two common sources of inferential error: (1) a tendency to overuse simplistic strategies and fail to employ the logical and statistical rules that guide scientific analysis and (2) a “tendency to attribute behavior exclusively to the actor’s dispositions and to ignore powerful situational determinants of the behavior” (p. 31).

Even though their views have stressed the intellectual limitations of individuals, cognitive psychologists have recognized that individu- als do participate actively in perceiving, interpreting, and making sense of their world. By contrast, until fairly recently, sociologists have tended to give primacy to the effects of contextual factors, viewing individuals as more passive, prone to conform to the demands of their social systems and roles. Identity theory has emerged as a corrective to this oversocialized view by giving renewed attention to an active and reflexive self that creates, sustains, and changes social structures (see Burke and Reitzes 1981; Rosenberg 1979; Stryker 1994). Similar issues are addressed by structuration theory, discussed in Chapter 4.

Culture Theory

These advances by advocates of the nature persuasion have forced some retreats by, but have by no means defeated, the nurture advocates. Irrespective of capacities and predispositions on the part of individual human actors, all scholars agree that learning occurs in a social context. The groundwork was laid by Franz Boas (1982), a cultural anthropolo- gist working at the turn of the 20th century, who, “by stressing the plas- ticity of human culture . . . expanded human nature into an infinity of possibilities rather than a prison of constraints” (Ridley 2003: 202). One of the important developments in cultural theory involved a shift away from a more diffuse definition of culture as encompassing the entire way of life of a people to focus on its semiotic functions. Worthy successors to Boas, like Alfred Kroeber and Clyde Kluckhohn (1952: 357), carried for- ward this tradition, concluding that “culture consists of explicit and implicit patterns of historically derived and selected ideas and their embodiment in institutions, practices, and artifacts.” Their more elo- quent protégé, Clifford Geertz (1973: 5, 12), elaborated the message: “Believing, with Max Weber, that man is a social animal suspended in webs of significance he himself has spun, I take culture to be these webs. Culture consists of socially established structures of meaning.”

Donald (1991) has proposed a coevolutionary view in which the cognitive capacities of our species and the cultures we have devel- oped have advanced in complementary ways. Advancing a “cogni- tive classification of culture,” Donald suggests that human culture has progressed from

  • an episodic one in which lives were experienced as a series of concrete episodes to
  • a mimetic one resting on visuomotor skills that produced con- scious, intentional, representational acts (e.g., tool-making, coordinated hunting) to
  • the use of language that supports a mythic culture enabling an oral-narrative system allowing the creation of more comprehen- sive models of the nature of the world and our place in it to
  • a theoretic culture involving written language and other forms of symbolic representation (maps, musical notation, architectural drawings) that allows for their externalization in media (books, films, digital media) that can be preserved, corrected, and trans- mitted over time and space.

Note that the emergence of theoretic culture supports new types of human enterprise, including the development of the sciences, numer- ous types of theoreticians, and a wide range of professions, which begin to specialize in the production, evaluation, and dissemination of various types of specialized knowledge (see Chapter 5). Each of these levels or phases represents not only advances in the complexity of cul- ture but, simultaneously, improvement in cognitive capacity to the point where some scholars propose that

genes are very far from being fixed in their actions. Instead, they are devices for extracting information from the environment. Every minute, every second, the pattern of genes being expressed in your brain changes, often in direct or indirect response to events outside the body. Genes are the mechanisms of experience. (Ridley 2003: 248)

All culture theorists underline the importance of symbolic systems in the ordering of social life, but a growing number also recognize that such systems embody not only content but also affect. The meanings embedded in systems are emotional as well as substantive. It is no doubt in recognition of this fact that Tocqueville (1835/2004), the justly famous student of American character and culture, referred to the cul- tural mores guiding its citizens as the “habits of the heart” (see also Bellah, Madsen, Sullivan, Swidler, and Tipton 1985). As D’Andrade (1984: 99) points out, “ideas, feelings, and intentions are all activated by symbols and are thus part of the meaning of symbols.” Sociologist David Heise (1979) goes even further to assert that the meanings of settings, actors, and behaviors, indeed, of any social category, are pri- marily affective (see also Thoits 1989). Almost any type of stimulus evokes some sort of affective response, and many types of symbolic expressions—thanks, apologies, curses—specifically refer to feelings. Much of the motivation that propels action in any situation comes from the feelings evoked by the shifting patterns of meanings.

A limitation long present in the approach to culture taken by many sociologists is the assumption that culture is subordinate in interest and importance to social structure. The distinction between social structure, made up of the “relational system of interaction among indi- viduals and collectivities,” and culture, made up of “transmitted and created content and patterns of values, ideas, and other symbolic- meaningful systems” of symbolic and normative systems, is one of long standing (Kroeber and Parsons 1958: 583). Sociologists have tended to privilege social structure over symbolic systems in their accounts of behavior. The new cultural arguments stress the indepen- dent effects of cultural systems. Current institutionalists view the cultural and the social structural as interdependent.

Symbolic systems vary in the extent to which they exhibit unifor- mity and promote consistency of action. All too often, it is assumed that cultures are stable and constraining. However, more recent work stresses that culture can enable change. Swidler (1986: 277–278), for example, argues that whereas in “settled” times “culture accounts for continuities . . . organizing and anchoring patterns of action,” in times of change, culture functions more like a “tool kit,” providing reper- toires “from which actors select different pieces for constructing lines of action.”

4. Neoinstitutional Theory in Sociology

Sociological scholars have ranged rather widely in assembling the principal ingredients making up neoinstitutional approaches to organi- zational sociology. They have drawn upon developments in the neigh- boring disciplines of psychology and anthropology, as well as their homegrown subdiscipline, ethnomethodology.

Phenomenology and Ethnomethodology

Phenomenology, which began as a branch of philosophy, was incor- porated into social science by scholars such as Schutz and Berger, who “stressed the in-depth exploration of the meanings associated with symbols” (Wuthnow 1987: 42). These scholars clearly embraced a view of culture as primarily a semiotic system. They also distanced them- selves from the prevailing focus on shared norms and values, as exem- plified in the work of Durkheim and Parsons, to emphasize shared knowledge and belief systems. Behavior is shaped not only by attention to rules and the operation of norms, but also by common definitions of the situation and shared strategies of action. As noted in Chapter 1, attention to cognitive frames and cultural frameworks rather than normative systems is one of the major distinguishing marks of neoinsti- tutional theory in sociology (see DiMaggio and Powell 1991: 15–18).

Corresponding to the changing conceptions of culture, in particu- lar the “theoretic” mode, to use Donald’s terminology, another impor- tant shift in emphasis involves the recognition that symbols exist not only as internalized beliefs but also as external frameworks. Much work in sociology (e.g., Parsons’ value orientations and survey meth- odologies) treats beliefs as primarily internalized and subjective. By contrast, the types of data preferred by the new cultural scholars “are more readily observable kinds of behavior”—such as verbal utterances, rituals, codified bodies of knowledge, and cultural artifacts—“rather than [those] locked away in people’s private ruminations” (Wuthnow 1987: 56). Such approaches direct attention away from the internalized, subjective nature of culture and treat symbols as external, objective phenomena.10 This emphasis is particularly apparent in Berger and Luckmann’s (1967) conceptualization of the construction of common meaning systems. They stress three moments or phases:

  • externalization—the production, in social interaction, of sym- bolic structures whose meaning comes to be shared by the participants;
  • objectification—the process by which this production “comes to confront him as a facticity outside of himself,” as something “out there,” as a reality experienced in common with others; and only then comes
  • internalization—the process by which the objectified world is “retrojected into consciousness in the course of socialization.” (pp. 60–61)

As noted in Chapter 1, Berger and Luckmann (1967) define this three-phase process as one of institutionalization. Institutions are sym- bolic systems that are “experienced as possessing a reality of their own, a reality that confronts the individual as an external and coercive fact” (p. 58).11 A more recent manifestation of this recognition of the impor- tance of culture as an external symbolic framework is a concern with the “production of culture”—an examination of the ways in which cultural items are produced, distributed, selected, and institutionalized (see Becker 1982; Caves 2000; Griswold 1992; Hirsch 1972; Lampel, Shamsie, and Lant 2006)

Closely related to phenomenology is the subfield of ethnomethod- ology. In an attempt to combat the prevalent models of social order advanced by Parsons and others, Harold Garfinkel (1974) coined the term ethnomethodology, corresponding to usage in cultural anthropol- ogy, to refer to the “common-sense knowledge” of how to operate within some social arena as developed and acquired by its participants. Ethno– stresses the local, indigenous production of meaning; -methodology, that the knowledge involves distinctions and rules necessary for carry- ing on the work at hand.

Researchers within this tradition have primarily studied behavior in work settings or that of other types of actors, such as jurors, engaged in some collective task. The questions posed by these researchers are: How do such individuals make sense of the situa- tions they confront? How do they, collectively, construct the rules and procedures that allow them to cope with everyday demands? Detailed participant observation studies have been conducted—in police stations, welfare agencies, and psychiatric clinics, among other sites—to elicit these shared meanings (see Cicourel 1968; Garfinkel 1967; Zimmerman 1969).

As DiMaggio and Powell (1991: 20) emphasize, ethnomethodolo- gists challenged and supplemented Parsons’ model by stressing the cognitive rather than the evaluative-normative components of behav- ior; and they questioned the neoclassical economic model of rational decision making by emphasizing the tacit, routine nature of choice in organizational settings.

These then were the mix of ideas and themes that came together beginning in the 1960s to seed the development of neoinstitutional theory in sociology. Although, as noted, some of these ideas were being devel- oped in and applied to organizations by ethnomethodologists, they did not penetrate the mainstream of organizational studies until the 1970s.

Neoinstitutional Theory and Organizations: Founding Conceptions

An important early attempt to introduce neoinstitutional argu- ments to the study of organizations was made by David Silverman (1971), who proposed an action theory of organization. Silverman attacked prevailing models of organization, including contingency arguments and Parsons’ and Selznick’s structural-functional views, as being overly concerned with stability, order, and system maintenance. Drawing on the work of Durkheim, Schutz, Berger and Luckmann, and Goffman, Silverman proposed a phenomenological view of organiza- tions that focuses attention on meaning systems and the ways in which they are constructed and reconstructed in social action. Silverman con- trasts his action approach with the prevailing systems view:

The Systems approach tends to regard behaviour as a reflection of the characteristics of a social system containing a series of imper- sonal processes which are external to actors and constrain them. In emphasizing that action derives from the meanings that men attach to their own and each other’s actions, the Action frame of references argues that man is constrained by the way in which he socially constructs his reality. (p. 141)

Adopting the insights of Durkheim, Silverman (1971) argued that meanings operate not only in the minds of individuals but are also objective social facts residing in social institutions. The environments of organizations need to be conceptualized not only as a supply house of resources and target of outputs but also as a “source of meanings for the members of organisations” (p. 19).

Silverman’s critique and attempted redirection of organizational theory had more impact in European than U.S. circles (see Burrell and Morgan 1979; Salaman 1978).12 Another European social theorist, Pierre Bourdieu, employed a general conception of social field to refer to social arenas governed by distinctive values and approaches. Bour- dieu emphasized the contested nature of social fields and the role of power in resolving these contests (see Chapter 8). Fields can be exam- ined as social phenomena external to any particular actor but also exist as subjective, internalized mental elements. In his analysis of social structures, Bourdieu (1977) places great importance on the inter- nalization of cultural rules. His concept of habitus refers to the exis- tence of a “system of lasting and transposable dispositions which, integrating past experiences, functions at every moment as a matrix of perceptions, appreciations and actions” (p. 95) allowing individuals to structure their behavior within situations (see also Bourdieu and Wacquant 1992: 94–149). Bourdieu’s work was also much more influ- ential in Europe than in the United States, until recently, when it served as one of the precursors to the development of the conception of organization field (see Chapters 4 and 8).

A subsequent effort to introduce the new institutional arguments into organizational sociology proved to be much more successful. Two seminal articles appearing in the same year introduced neoinstitutional theory into the sociological study of organizations. Articles by Meyer and Rowan (1977) and by Zucker (1977), like Silverman’s work, built primarily on Durkheim’s and, especially, Berger and Luckmann’s con- ception of institutions.

John Meyer and Brian Rowan embrace the view of institutions as complexes of cultural rules. But in their formulation, not any and all cultural rules are supportive of organizations. Following Peter Berger’s lead (see Berger, Berger, and Kellner 1973), Meyer and Rowan stress the importance of beliefs that are rationalized—formulated in ways that specify the design of rule-like procedures to attain specific objectives. The engines of rationalization include the professions, nation-states, and the mass media whose efforts support the development of larger numbers and more types of organizations. Organizations are not sim- ply the product of increasing technical sophistication, as had long been argued, or even of increasingly complex relational patterns, but result from the increasing rationalization of cultural rules that provide an independent basis for their construction. Meyer and Rowan emphasize the impact on organizational forms of changes in the wider institu- tional environment.

While Meyer and Rowan developed the macro side of the argu- ment, Lynne Zucker (a student of Meyer) emphasized the “microfoun- dations” of institutions (see Zucker 1991). She stressed the power of cognitive beliefs to anchor behavior: “Social knowledge, once institu- tionalized, exists as a fact, as part of objective reality, and can be trans- mitted directly on that basis” (Zucker 1977: 726; see Chapter 6).

Other influential contributions soon thereafter, by DiMaggio and Powell (1983) and by Meyer and Scott (1983b), elaborated the macro (environmental) perspective, which has become the dominant empha- sis in sociological work. DiMaggio and Powell distinguished three important mechanisms—coercive, mimetic, and normative—by which institutional effects are diffused through a field of organizations, and emphasized structural isomorphism (similarity) as an important conse- quence of both competitive and institutional processes. Meyer and Scott proposed that all organizations are shaped by both technical and institutional forces, but that some types of organizations were more strongly influenced by one than the other. Both sets of authors identi- fied the organization field or sector as a new level of analysis particu- larly suited to the study of institutional processes. Organization fields help to bound the environments within which institutional processes operate (see Chapters 4 and 8).

This early work in combination set in motion a wave of new effort linking institutions to organizations that has continued to fuel and guide an expanding set of studies with applications to new problems and fields of inquiry—from micro-mobilization to globalization pro- cesses. Like pioneering work in any arena, it has had an imprinting effect on much of the subsequent development of the field. But such influence has both its positive and its negative sides. As we will discuss in subsequent chapters, while the pioneering statements provided valuable insights to pursue, they also contained flawed or limiting assumptions that are still in the process of being corrected.

Powell and DiMaggio (1991) helped to underline the importance of these early papers by reprinting them as the foundational state- ments of the new institutionalism in organizational analysis in their influ- ential edited volume. They also pointedly defined the differences between old and new institutionalism, the former represented by Selznick and his followers. The old model privileged conflicts of inter- est, power processes, informal structure, values, norms, and social commitments, and saw institutionalism as a process occurring within an organization. The new model emphasized cultural and constitutive processes, routines and schemas, legitimacy processes, and formal structure, and viewed institutionalism as a process occurring in the environment of organizations, often at the field level (DiMaggio and Powell 1991). These distinctions continue to be widely employed, although there have been numerous attempts to move beyond this oversimplified dichotomy (e.g., Greenwood and Hinings 1996; Hirsch and Lounsbury 1997).

Also active among sociologists are a set of investigators embracing a rational choice approach to social institutions. Their assumptions and approaches are quite similar to those already described as operating in economics and political science. While their numbers and influence are considerably smaller in sociology than in these other disciplines, they include a number of prominent sociologists, including Coleman (1990), Hechter (1987; Hechter, Opp, and Wippler 1990), and Nee (1998). As Coleman (1994) notes, these theorists embrace the “principle of actor maximization”—some in the stronger sense, others in the weaker, bounded rationality sense—as the “source of deductive power of ratio- nal choice theory.” But unlike neoclassical economics, they replace the “assumption of a perfect market with social structures, sometimes regarded as endogenous, and other times as exogenous, which carries individual actions into systemic outcomes” (p. 167). And at least some of these analysts allow for the effects of “context-bound rationality within which individual interests and group norms develop” (Brinton and Nee 1998: xv).

Source: Scott Richard (2013), Institutions and Organizations: Ideas, Interests, and Identities, SAGE Publications, Inc; Fourth edition.

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