While economists h ave concentrated their attention on market sectors, research on the selection environment of nonmarket sectors has been undertaken principally by anthropologis ts, sociologists, and political scientists. This in itself would h ave led to some signifi cant differences in focus and analysis. But to a considerable extent the differences in analysis appear to reflect real differences in the se lection environments.
An essential element in most theorizing about market selection environments is a relatively clear separa tion of the “firms” on the one hand, and consumers and regulators on the o ther. Consumers’ evaluation of products-versus their evaluation of other products and versus price- is presumed to be the criterion that ought to dic tate resource allocation. Firms can be viewed as bidding and com peting for consumer purchases, and markets can be judged as work ing well or poorly depending on the extent to which the profitability of a firm hinges on its ability to meet consumer demands as well as or better than its rivals. The viability of an innovation should depend on consumers’ evaluation of it.
A hallmark of nonmarket sectors is that the separation of interests between firms and customers is not as sharply defined as in market sectors. The relationship between a public agency, such as a school system, and its clientele (students and parents) and sources of finance (mayor, council, and voters) simply does not have the arm’s-length-distance quality that marks the relationship between seller and potential buyer of a new car. Relatedly, the question of how legitimate values are to be determined is much more complex in nonmarket sectors than in market sectors. The public agency is ex pected to play a key role in the articulation of values and to internal-ize these and work in the public interest of its own volition . This is so in many nominally private-sector activi ti es, such as the provision of medical services by doctors. The doctor is not supposed to make his decisions regarding the use of a new drug on the basis of whether this will profit him, but rather on his expectation of how this will benefit his patients . Further, he is supposed to know more about that than do his patients. This is not to say that interests of firms and con sumers are in fact consonant. In most nonmarket sectors (as in market sectors where competition is lax) the firm has a good deal of discretionary power regarding what it is to provide, and the cus tomer may have little direct power to reward or to punish p erform ance. For example, the specific view of the public interest articulated by a public agency often seems to be highly consonant with the re quirements for the survival and growth of the agency itself. But in general the appropriate “control” mechanism over a provider of goods and services in a nonmarket s ector is not viewed as competi tion among providers for the consumer dollar.
For these reasons, one cannot assume that the firms in a nonmarket sector are motivated solely by monetary profit. This makes it difficult to analyze the operative values relating to acceptance or re jection of an innovation. As in the theory of consumer behavior, as contrasted with the textbook theory of the firm, tastes matter; they may be hard to analyze and may not be stable. Even in situations where there is a relatively clear-cut goal and where the decision to employ an i nnovation or not hinges on assessment of efficacy relative to that goal, it has proved hard to identify relevant criteria. Thus, in the Coleman, Katz, and Menzel (1957) study of the diffusion among p hysicians of a new pharmaceutical, the authors did not even at tempt to specify quantitatively the ways in which the new product was superior medically to preexisting alternatives. In Warner’s (1974) study of the decision by doctors to use new chemotherapeutic tech niques for the treatment of cancer, for several of the cancer varieties that were treated with this method there was no quantitative evi dence that the therapy had any effect. The physicians made their de-cisions on hope, with no objective evi dence. Friedman (1973), in his study of the acceptance and spread of a certain program of bail re form, was able to identify a few rather specific reasons why the key agencies might find the reform attractive. But the reasons were largely qualitative and it is interesting that, after adopting the re form, there was no real monitoring to check that the programs were performing as hoped. In fact, the performance of the program eroded over time in at least one key dimension, and no one noticed .
Political and regulatory control over firms cannot provide the per vasive, if not always coercive, set of value signals and incentives that is provided by consumer sovereignty in market sectors. Thus, there is greater room left for autonomous and discretionary behavior on the part of suppliers. However, the employment of regulatory and political mechanisms of governance, as contrasted with consumer sovereignty, means that in many cases several different parties may have to go along before an innovation can be operative. In Friedman’s study of bail reform, the police and the courts both had to agree to the proposal, and legislative agreement was necessary where budget considerations were involved. Government agencies often have to gain specific agreement from both political chief executives and a legislature before they can proceed with a new program.
Nonseparation of suppliers and demanders leaves little room for firms to compete with one another for consumer dollars. Where there is a single supplying entity- such as the United States Postal Service or the Department of Defense- diffusion of an innovation is a matter of internal decision making constrained and pressured to some d egree by the higher-order political pro cesses. Where there is a range of suppliers – as in medicine or in state and local govern mental agencies-innovations must spread largely through imita tion across the spectrum of noncompeting firms. At the same time, there is no incentive for the innovating firm to deter imitation. Orga nizations that cannot expand into the terrain of others and know that others cannot encroach on their territory have little to gain from pre venting others from adopting their successful innovations. Indeed, in most of the sectors under consideration here, there are formal arrangements for cooperation and flow of information across firms. In many, professional organizations set values and judge the merit of new innovations. The professional stamp of approval, and the adop tion pattern it stimulates, often are the only criteria of merit available to a nonprofessional .
Consider the quasi- market for the provision of physician services. Without strong constraints afforded by consumers or outside regu lators, consumer welfare is guarded (perhaps not so securely) largely by p rofessional standards of e fficacy of treatment. To assess the effi-cacy of new treatments, doctors consult with each other and ap parently aim for professional consensus guided by the judgment of certain key experts. Mohr’s study (1969) of the spread of new prac tices and policies across local public health services reveals a similar professionalism at work. Walker’s (1969) study of the lead and lag pattern among state governments in the adoption of new programs indicates the presence of regional groups with intraregional leaders (generally in populous, urban, and wealthy states) to which officials in departments in other state governments look for references and models.
Professional judgments are moderated by political constraints on spending limits and by other governmental regulatory processes that impinge on decision making in a more detailed way. Thus, in Mohr’ s study the speed with which a local public health service adopted new practices was found to be positively related to the extent to which public health professionals were in control of the key office. How ever, the professional bias toward adoption of new techniques was moderated by political and budgetary constraints. Th ese, which had to do with the composition and presumably the attitudes of the local “consuming” populations, did limit, if in a loose way, the innova tions that local public health services could afford to adopt. Similarly, Walker’ s study showed that budgetary constraints imposed by state political systems significantly moderated the proclivity of state offi cials to adopt progressive programs (read: programs adopted by other states whose judgments they admired).
Crain’s (1966) study of the spread of fluori dation among American cities is perhaps the most revealing example of a sector in which the “firms” have a bias toward adopting an innovation based on notions of professional or technical appropriateness but in which “con sumers” tend to resist it . He notes that the spread of fluoridation first occurred q uite rapidly, in a context in which local health profes sionals were in charge of the decision. As time elapsed, fluorid ation became a more openly political issue, and mayors began to take the decision-making authority out of the hands of the professionals. The spread of fluori dation slowed significantly. Still later, it became common for citizen referendum to become the vehicle for decision . This development brought the spread of fluoridation to a virtual halt. The pattern in all of these cases is quite different from that in the market sectors studied by economists . It is, however, easy enough to see the same broad elements of modeling that need to be stressed : motivations of th e firms in the sector (in general, not characterizable in terms of monetary profit), the ways in which consumers (often voters) and financers (often legislatures) may constrain firm behavior, and the mechanisms of information and value sharing among firms in the imitation process (which IS the dominant mechanism by which an innovation spreads) .
Source: Nelson Richard R., Winter Sidney G. (1985), An Evolutionary Theory of Economic Change, Belknap Press: An Imprint of Harvard University Press.