Institutions, organizations, impersonality, and interests: The dynamics of institutions

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Abstract

Institutional economists concerned with rules often focus on the trade-off between individuals and social incentives. This paper argues that the real trade-off that individuals face is between the organizations they belong to in contrast to social rules, and asks when do individuals find it in their interests to act in the interests of their organizations and when do they support impersonal rules? The answer involves a distinction between anonymous relationships between individuals who do not know each other personally, but know the organizations that the other belongs to, and impersonal relationships in which all individuals are treated the same.

Introduction

Impersonality – treating everyone the same without regard to their individual identity – ranks near the top of good institutional outcomes in the pantheon of growth theory. Rule of law requires laws that apply equally to all citizens and judicial systems that apply the laws impartially. Secure and transferable property rights require identification of ownership without respect to individual identity. Viable contracts require that any legal competent individuals enjoy the same abilities and responsibilities with respect to contractual terms. Competitive markets, competitive polities, religious tolerance, and mass education all require a society to recognize that individuals be treated the same. Lady Justice, sword in one hand and scale in the other, blindfolded so that she cannot she the identity of the persons whose fate she weighs in the balance, is an icon of the modern open access society. While impersonal relationships require blind justice and therefore formal rules, impersonality is more just a matter of law. In order to be sustainable on a wide scale, impersonality must pervade norms of behavior, notions of fairness, equity, and tolerance, and even of morals and ethics. People must find it in their interest to support and obey the rules impartially. As a result, societies with institutions that support impersonal relationships throughout society are relatively rare. The first appear in the historical record only around 200 years ago.

This paper grapples with understanding the institutional dynamics of societies capable of sustaining impersonal relationships in many areas of human interaction. Such societies require rules and norms that are widely understood and enforced in an unbiased manner, and they require that individuals generally have an interest in following the rules. The approach to rules in this paper differs substantially from the normal way that economists and other social scientists think about rule following. The tension between rules and individual incentives is usually conceived as a tension between the interests of the individual and the group, as in Rousseau's “stag hunt” or Olson's “logic of collective action.” Rule following behavior is modeled as a trade-off between individual gains from deviating from the rules set against the costs imposed on deviators (who are caught and punished with some probability). The emphasis on the individual versus the group reflects the presumption that the origin of the rules or norms lies in the welfare of the larger collective.

In contrast, this paper focuses on the tension between groups and the rules. Most societies are made up of many groups, each group with its own rules and norms. Rules and norms that develop in specific circumstances and apply to specific individuals in specific organizations cannot be “impersonal” rules or norms that apply more broadly outside the organization to large numbers of people. Impersonal social rules must apply equally to all people in all groups, and so an inevitable tension arises between the rules and interests of specific groups (organizations) and the wider society.

A simple but pervasive example of this tension in all human societies is the proclivity for groups of adolescent males and/or females to create norms and even formal rules of behavior within their groups that are at variance with the rules of the society around them. Parents agonize over the possibility that, when faced with a choice between the interests of their peer group and the interests of the larger society, their children will choose to follow their peer group rules rather than the social rules. Adolescent peer groups organize on a more personal and less structured basis than the informal and formal organization most adults belong to, but adults face the same problem of acting in support of the interests of their organizations rather than acting in support of the formal (and perhaps impersonal) rules of the larger society when the interests of their organizations come into conflict with the social rules. The appropriate question to ask is: when do individuals find it in their interest to support their organizations and when do they find it in their interests to support impersonal social rules, when the two are in conflict?

Concrete examples of such choices occurred in 2000 and 2007/2008. In the American presidential election of 2000, George Bush and Al Gore ran an extremely close race that turned, in the end, on the results of voting in the state of Florida. The Governor of Florida was George Bush's brother, Jeb, and the Attorney General of Florida ruled that Bush had won the Florida balloting when many still felt that more investigation was warranted. The Florida ruling was immediately taken up through the court system. When the Supreme Court ruled in favor of Bush, Al Gore and the Democratic Party, at considerable expense to their interests as individuals and as an organized party, accepted the Court's decision. The legal rules had played out, a decision was reached, and Gore and the Democrats accepted it.1 In contrast, in December 2007, when the presidential election in Kenya produced a close result and the incumbent, Mwai Kibaki, was declared the winner, Raila Odinga, the candidate of the losing Orange Democratic Movement protested the results. Over the next two months, violence repeatedly broke out in Kenya and hundreds of people were killed. At the end of February, a negotiated agreement, the National Accord and Reconciliation Act, created the framework for the competing factions to restructure the Kenyan constitution, including the creation of a new office of Prime Minister to be filled by Odinga, and substantially increasing the number of cabinet posts to accommodate the organizations of Kibaki and Odinga. In the United States in 2000, Democrats acted to support the rules and against the interest of their organization. In Kenya in 2008, Kenyans acted to support their organizations against the rules, and ended their organized conflict only after the formal rules had been fundamentally altered in a very personal way. When do individuals find it in their interest to support their organizations and when do they find it in their interests to support impersonal social rules, when the two are in conflict?

The first part of the paper, composed of four sections, unpacks the concepts that make up the question. What is impersonality? While impersonal relationship and exchange are fundamental concepts in the new institutional economics, the “treating everyone the same” definition of impersonality is not the commonly used definition. Instead, impersonality is usually defined as “dealing with people you do not know.” In order to distinguish the two definitions, “anonymous” relationship is used to denote relationships between people who do not know one another personally, but nonetheless can recognize the other person's social identity. The first section considers the implications of the two definitions, particularly with respect to rules. The second section gives a specific definition to the concept of interest. More than tastes and preferences, individual interests are shaped by tastes, preferences, beliefs, the choices available, and the relative prices associated with the choices. Whether an individual “finds it in their interest” to support an organization rather than to support impersonal rules is a function of all these factors. The third section lays out an economic approach to the nature of organizations, in which the interests of the individual members are aligned to sustain coordinated and cooperative behavior. The fourth section looks into how a system of mutually supporting organizations might arise in a society, drawing on the argument of North, Wallis, and Weingast (2009 hereafter NWW). They describe a “natural state” in which an interlocking set of organizations provide incentives for individuals and the organizations to limit the use of violence, sustain a modicum of coordination, and enable third-party enforcement for organizational arrangements. The use of third-parties to enforce or adjudicate arrangements within organizations and between organizations, moves the discussion into the realm of rules, but rules that are by their very nature personal and idiosyncratic rather than impersonal.

The second part of the paper, in three sections, considers institutional dynamics through time. Rule following is never a static process. As individuals and organizations adapt to rules they find margins on which they can evade or modify the rules. Impersonal rules must be consistent with institutional dynamics that lead powerful interests to find it in their interest to sustain them. How does the interplay of individuals and organizations shape the continuous process of change in the beliefs, norms, and rules that together make up the institutional structure of a society?

Section snippets

Impersonality

Impersonal relationships occur when two individuals interact in a way that does not depend on their personal identity. Impersonal relationships only occur in societies that are capable of creating and sustaining an impersonal identity of “citizen” or “resident” that applies equally to a large number of people.2 The essence of

Rents, rules, organizations, and individual interest

The limited access society depicted in Fig. 1 is capable of anonymous exchange on a large scale, but not impersonal exchange. It is capable of formulating rules that can be sustained by the interaction of interests in the dominant coalition and contractual organizations, capable even of forming sophisticated organizations, but it is also a society that rests on the creation of rents and, ultimately, relationships between powerful organizations and individuals. Institutional change occurs along

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  • Cited by (0)

    This paper was written for the conference on The Dynamics of Institutions in Perspective: Alternative Conceptions and Future Challenges, organized by Eric Brousseau, Pierre Garrouste, and Emmanual Raynaud in Paris October 3 and 4, 2008. I appreciate the comments of Pierre Garrouste and Benito Arrunada conversations with Lee Alston, Mushtaq Khan, Steve Webb, Nicolas Meisel, Nick Crafts, Eric Brousseau, Jerome Sgard, Avner Greif, Naomi Lamoreaux, Roger Betancourt, Werner Troesken, Barry Weingast, and Doug North. This paper builds on the concepts of limited access and open access social orders developed in Doug North, John Wallis, and Barry Weingast Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. North and Weingast, however, should not be implicated in the extensions presented here.

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