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Understanding Institutions
The Science and Philosophy of Living Together
By Francesco Guala PRINCETON UNIVERSITY PRESS
Copyright © 2016 Princeton University Press
All rights reserved.
ISBN: 978-1-4008-8091-1
CHAPTER 1
RULES
Institutions are the rules of the game in a society or, more formally, the humanly devised constraints that shape human interactions. ... They are a guide to human interaction, so that when we wish to greet friends on the street, drive an automobile, buy oranges, borrow money, form a business, bury our dead, or whatever, we know (or can learn easily) how to perform these tasks.
— North (1990: 3–4)
The most famous and cited definition of social institution appears right at the outset of Douglass North's monograph on Institutions, Institutional Change and Economic Performance. North is primarily an economic historian, known for his work on trade and growth in early modern Europe. His writings however have influenced many scholars outside his field of specialization, and for this reason in 1993 he was awarded the Nobel Prize in economics. The conception of institutions as rules is not North's invention, to be sure. Similar definitions can be found in the writings of prominent social scientists of the twentieth century, like Max Weber, Talcott Parsons, and Friedrich Hayek. In philosophy, rule-based theories are equally popular — an original version proposed by John Searle will be discussed later in the book.
The conception of institutions as rules is intuitive, and fits with our pretheoretical understanding of many paradigmatic institutions. Consider marriage for example: the state of being married is associated with several rights and obligations. In most Western countries both husband and wife are responsible for procuring the material resources that are necessary to support the family. They are responsible for their kids' well-being and education. Moreover, they share a mutual obligation to be faithful and to help each other in case of need.
At the level of token institutions these general principles are translated into more specific behavioral rules that govern the division of labor of the spouses in their everyday tasks. Some rules regulate chores ("I cook, you wash dishes"), others regulate child care ("I change nappies, you feed the baby"). Some rules concern finance, others concern sexual behavior, and so on and so forth.
The reason why such rules exist is fairly obvious: they help husband and wife achieve goals that would be difficult to attain if they acted independently. If they both devote a lot of time to cooking, but nobody feeds the children, the kids are going to starve. If they both look after the children but no one goes to work, there will be nothing to cook tomorrow. As an analogy, consider a team of basketball players: if they follow their coach's assignments (he runs, you pass the ball; she defends, you attack) a group of players can hope to win matches and trophies. Without rules, in contrast, they will probably lose every single game. Another example that recurs in discussions of institutions is with the rules of traffic: institutions regulate individual actions in such a way that everyone can benefit from orderly behavior, just like complying with traffic rules is generally beneficial to drivers. Unpleasant events — accidents, jams, disputes — are avoided, or at least their frequency is significantly reduced if we all follow the rules.
Two points must be clarified before we move on. First, the idea that institutions are beneficial is dubious and perhaps even meaningless unless we specify clearly the contrast case: they are beneficial compared to what? Second, that institutions are generally beneficial does not mean that they benefit all individuals in the same manner. It is easy to find examples of unequal or unfair institutions: in traditional marriage arrangements, for instance, women are often burdened with more obligations and fewer rights than men. Similarly, servants are definitely worse off than their masters under the institution of slavery.
The latter example is particularly controversial: how can slavery be "beneficial," given that the institution itself is the main cause of servants' misfortune? The answer is that we are not comparing the welfare of slaves under this terrible institution with the welfare they could enjoy in a more humane institutional arrangement. The right comparison is with the welfare they would enjoy in a noninstitutional arrangement. Historically, slavery has tended to arise whenever the asymmetry of power between two social groups has been so large that one of them could easily exterminate the other. The enslavement of Native Americans in the sixteenth century, for example, was the consequence of the superior military technology, organization, and resistance to diseases of the European conquerors. Slavery thus was "beneficial" to the slaves only in the grim sense that the noninstitutional alternative for Native Americans would have been genocide. So the point is merely that institutions improve people's lives compared to a situation without institutions, in which they behave independently without the guidance of rules. Institutions, in a nutshell, are better than chaos.
This is entirely compatible with the fact that many people might be better off under an alternative institutional arrangement. There is rarely a unique way of regulating our lives. In a basketball team, I might be the shooting guard and you might be the center, or the other way around. In a family, the husband may stay at home and the wife may go to work, or vice versa. Each particular institution — who does what, or who fills which role — allocates burdens in different ways, and consequently some people may prefer one type of institution to another. Occasionally, it may happen that we would all be better off under an alternative arrangement. People sometimes get stuck with bad institutions because they cannot decide to change the rules, or because they are not sure that new rules will be followed, or simply because they cannot see that a better institution is available.
One final remark on "beneficial" is in order before I proceed. The term refers only to the group of people whose behavior is regulated by the institution. Since institutions are often group-specific and exclude many people, it is possible that the benefits they confer to the members of one group are offset by the negative effects they have on the members of another group (the outsiders). A typical case is the Mafia, an institution governed by rules of secrecy, cooperation, obedience that benefit the mobsters but harm their victims. But even legal institutions like the army may have positive consequences for some individuals (the soldiers, the people they protect) as well as extremely negative consequences for others (the enemies and civilians who are killed during a war, for example).
Having said that, it is hard to deny that in general the capacity to regulate collective behavior is a tremendous asset for our species. The spectacular demographic growth of Homo sapiens and its rise to supremacy on Earth are due in large part to its social skills and flexibility of organization. Institutional economists like North have studied in particular the role played by institutions in facilitating economic growth. The idea — confirmed by a wealth of empirical studies — is that rules can help overcome obstacles that limit production, trade, and more generally hinder the welfare of a society. (Economists use the technical term "transaction cost" to refer to these impediments.) New rules may be created by an influential group, for example an enlightened ruler or government. However they may also emerge and evolve autonomously, without anyone in particular planning or foreseeing their effects. If they are successful, institutions are often spontaneously copied and disseminated across different social groups. But again, this is by no means guaranteed: clever ideas sometimes do remain unrecognized.
For historical and cultural reasons, a lot of research carried out in the past century has tended to emphasize the spontaneous emergence and diffusion of institutions. This was partly a reaction against an older approach to social policy that emphasized government intervention and central planning. Scholars interested in the spontaneous evolution of institutions draw a distinction between formal and informal institutional rules. "Formal" here means stated explicitly, codified in a set of laws, principles, rights that are publicly available and known or at least knowable by the relevant members of society. Such rules may be transmitted orally, but in complex societies they are usually preserved in written form. Informal rules, in contrast, are not explicitly codified and become manifest mostly through the behavior of individuals.
Friendship, for example, is governed entirely by informal rules: although there is no formal rule stating that you should not date your friend's boyfriend, it is generally agreed that it is not to be done and transgressions may cost you dearly. A complex institution like marriage in contrast is constituted both by formal and by informal rules. There is an important asymmetry between informal and formal institutions: while "purely" informal institutions are quite common, it is difficult to find examples of institutions that consist exclusively of formal rules. Even written legal codes rely heavily on informal practices for their interpretation and implementation. The fact that a certain rule is formally included in the body of principles that constitute the laws of a country actually has little significance in itself. Many laws are never followed and their transgressions are never punished, in spite of the fact that no one has bothered to abrogate them formally.
In May 2010 ten French ministers proposed to repeal a law forbidding women to wear trousers. The law had been in place since 1799, although hardly anyone had noticed for a long time. When it was finally recognized as invalid, in 2012, the official act of the French Parliament had mere symbolic significance. Rules like the French ban on trousers are ineffective. The distinction between effective and ineffective rules is very significant from a theoretical point of view, because it is strictly related to a deep problem of the rule-based conception that will keep us occupied for the rest of this chapter.
Effective rules are important for policy making because institutions are causal factors that can be manipulated to achieve certain goals, by changing people's behavior. For example, the introduction of an institution that provides insurance to farmers may change their business practices and improve the efficiency of their firms. The introduction of a rule of hygiene may reduce the incidence of stillbirths and improve the fertility of young women, and so on. The rule-based approach, by itself, however does not explain why people comply with the rules. Why are some rules followed and not others? This is not just a philosophical question. It is an extremely important practical issue, because if we do not know the answer we risk designing institutions (rules) that fail because people do not comply with them.
Another way to put it is this: rules are linguistic statements, but to state a rule — to say "do this," or "do that" — is not enough to create an institution. The case of the French law is an obvious example. In that case, the law was simply forgotten, but the problem is deeper: some rules are not implemented even though they are widely known. In several North American states for example the speed limit on the motorway is officially sixty-five miles per hour. However most cars drive between sixty-five and seventy-five. So clearly the formal rule is not effective — the real, informal rule sets the speed limit somewhere around seventy-five. But to say that sixty-five is not the "real" rule leaves many important questions unanswered: What distinguishes "real" from "nominal" rules? What is the difference between the sixty-five-and seventy-five-miles-per-hour rules? Why do people comply with the latter but not with the former?
A plausible explanation may go like this: although the formal rule sets the limit at sixty-five, there are advantages in being slack in its enforcement. A driver speeding at sixty-five for example may find herself in a situation where she should swiftly accelerate to avoid an accident. If she believes that small breaches of the rule are going to be fined, the driver might hesitate, with catastrophic consequences. Given that traffic rules are meant to reduce the number of accidents and improve safety, it is wise to leave a little room for maneuver around the official speed limit.
Second, there is a problem of measurement: measurement instruments are imprecise. This is true of both the instruments that are available to the drivers and those used by the police. Fining cars that speed at sixty-six miles per hour would generate a lot of litigation, appeals, discontent, accusations of unfairness. So it may be wise for the police to sanction only major violations of the traffic rules. In practice the police may decide to implement a strategy like this: fine every car speeding at seventy-five miles per hour or more; fine some cars speeding at seventy to seventy-five; fine no car speeding at sixty-five to seventy. This strategy would work reasonably well and ensure that most people drive right around seventy. But those who are caught speeding at seventy-five or more cannot complain if they get a ticket: they were clearly exceeding the official speed limit.
The above explanation depicts an effective rule as a stable state. Drivers have an incentive not to exceed seventy-five miles per hour; the police have an incentive to tolerate those who do not exceed that limit (because they do not want to waste too much time litigating). If a naïve observer were to look at the traffic flowing down the highway, she would conclude that the effective speed limit is roughly seventy-five: everybody's behavior confirms the expectation that one should not exceed that limit. The system is in equilibrium.
Three points are worth keeping in mind: First, simply to say that institutions are rules does not explain why people follow some rules but not others. Second, by trying to explain why the sixty-five-miles-per-hour rule is merely nominal, while seventy-five rule is effective, we are induced to analyze the factors (especially the incentives) that promote compliance. And finally, such factors take a special configuration — a kind of equilibrium state.
The preceding line of argument suggests that institutions must be special kinds of rules. They are better conceived of as rules that people have an incentive to follow. The concept of incentive and the concept of equilibrium are strictly related. Intuitively, a system is in equilibrium if the forces that determine its current state contribute to perpetuate it indefinitely. Take a book and put it on your desk, for example. The force of gravity pulls it toward the center of the Earth, but its fall is impeded by the force of cohesion of the molecules that constitute the surface of the desk. Unless some other force intervenes, this state of affairs will continue to hold indefinitely — the system is in equilibrium.
In the case of institutions, of course, the forces at play are different. Human behavior is affected by a large number of causal factors, and it would be foolish to try to give a full list. When social scientists are dealing with very general issues such as the nature of institutions, they use modeling tools that do not make a precommitment to any specific mechanism. They simply assume, for example, that the behavior of individuals is governed by "incentives." An incentive is a property of a state of affairs that motivates people to action. Incentives need not be material goods like food, sex, or shelter, and people need not be motivated by purely economic interests. It is perfectly legitimate to assume that people have different ultimate goals in life. If one's goal is to glorify the Almighty God, for example, it may be in one's interest to spend a lot of money to build a magnificent cathedral. If one's goal is to raise healthy and happy children, one may have an incentive to invest in education. Incentives in this sense do not necessarily depend on self-interest narrowly conceived.
A social system is in equilibrium when the incentives of the relevant actors contribute to keep it in its current state. A stable social state is not necessarily motionless like a book lying on a desk. It may involve frantic activity, and the actions of one individual may be quite different from those of another. But a social system in equilibrium is likely to be characterized by regular patterns of behavior: people will tend to do (roughly) the same things in the same circumstances. Thus, for example, a Martian who has just landed on Earth may notice that North American drivers tend not to exceed the seventy-five-miles-per-hour limit, with remarkable regularity.
Andy Schotter — a prominent game theorist and experimental economist — defines institutions as "regularities in behaviour which are agreed to by all members of a society" (1981: 9). Such regularities "can be best described as noncooperative equilibria" of strategic games (1981: 24), because out-of-equilibrium actions are unstable and are unlikely to be repeated in the course of many interactions. This definition summarizes the main elements of the equilibria approach to the study of institutions. Like its main rival (the rules account) the equilibria approach is more like a tradition or research program than a single theory. And like its main rival, it cuts across the divide between science and philosophy.
(Continues...)
Excerpted from Understanding Institutions by Francesco Guala. Copyright © 2016 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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