INSTITUTIONALIST THEORIES of MARKETS & ORGANIZATIONS

1. INSTITUTIONALIST THEORIES of MARKETS & ORGANIZATIONS Economic institutions are rules and regulations, with enforcement mechanisms, that constrain actors’ choices and behaviors. Actors that conform to taken-for-granted norms, structures, and practices of markets and organizations are viewed as legitimate, receive public approval, and access to a variety of resources. TAKEN-FOR-GRANTED ASSUMPTIONS are beliefs held without challenge that a homogeneous set of desirable actions and structures should be rewarded with financial resources, prestige, and public esteem LEGITIMACY involves normative beliefs by others about the proper, acceptable exercise of institutional authority (= “legitimate power”) Institutionalization evolves from informal norms toward increasing rule codification, sanctioned by regulatory bodies; e.g., college accreditation.

2. Old & New Economic Institutionalisms With Veblen, John Commons (1962-1945) & Wesley Mitchell (1874-1948) led Old Economic Institutionalism, stressing legal origins, & evolutionary, habitual, voluntary processes in the formation and change of institutions. OEI proponents stressed historical, legal, social, political, & other institutional factors on which economic “laws” are contingent. The market is not immutable, rather economic behaviors are conditioned by changing historical influences, especially evolution of societal institutions that shape an individual actor’s beliefs and actions. OEI was receptive to bringing the other social sciences into economics to help understand the origin and development of institutions. But by 1930s, once-dominant OEI was eclipsed in U.S. by neoclassical & Keynesian economics. In stark contrast, New Economic Institutionalism relies on neoclassical econ principles to show how institutions result from individual actor’s preferences, transaction costs, legal property rights. Key NEI theorists include Ronald Coase, Oliver Williamson, Douglass North, Armen Alchian, Harold Demsetz.

3. Everything Old is New Again Contemporary economists reintroduced “traditional” institutionalism by rejecting NIE’s reduction of institutions to preferences and technologies. “Tastes” affect institutions, but are also shaped and constrained by them. Geoffrey Hodgson argued that to regard actors only as rational utility-maximizers is either “inadequate or erroneous.” People’s preferences don’t simply create the institutions within which they work and live their lives. Instead, by various processes of “reconstitutive downward causation,” institutions come to “affect individuals in fundamental ways.” • How did advertising and marketing institutions develop that shape consumer choices? (Are your decisions never affected by ads?) • Do consumers have any influence on the advertising industry? • What governmental & private-sector institutions regulate advertisers’ claims about product/service safety and quality? How effectively?

4. The Great Divide Talcott Parsons (1902-79) foisted a theoretical division of labor between economics & sociology – allocation of means vs. ultimate “value factor.” Both disciplines neglected to theorize & investigate economic institutions. Parsons’ AGIL scheme of functional system problems, with four subsystems specializing in meeting a society’s needs for: Adaptation: acquire sufficient resources; economy & businessGoal Attainment: set and implement goals; politics & governmentIntegration: maintain solidarity & subunit coordination; courts, religions Latency: create, preserve, transmit culture & values; family, education • In Economy & Society (1956), Parsons & Neil Smelser subsumed economic theory as “a special case of the general theory of social systems:” • Money, power, value, influence are four fundamental generalized media of exchange • Apart from mediating purchases, money is also a cultural object with social meanings • Markets and firms (core economic subsystem structures) follow utility-maximizing principles viewed as illegitimate for other subsystems: families, churches, courts, ... • Explaining how complex exchanges of these four symbolic media across the four AGIL subsystems can functionally integrate a society is a central theoretical task for sociology

5. Institutions Redux Only when economic sociology revived in the 1980s was the study of economic institutions restored to a theoretically central position. Mark Granovetter (1985) had imperialist aims – to substitute social action theory for neoclassical explanations of economic behavior: 1. Economic action is embedded in networks of social relations 2. It is directed at pursuit of both economic and noneconomic goals 3. Economic institutions are socially constructed How well has this agenda succeeded in creating “an elaborate conceptual apparatus” to challenge mainstream economics? How are noneconomic goals such as “sociability, approval, status, power” involved in pursuing economic goals? Examples? Has sociological institutional theory generated empirical work that better explains economic behavior than does neoclassical utility theory?

6. Regulative Normative Cultural-Cognitive Basis of compliance Expedience Social obligation Taken-for-grantedness Shared understanding Basis of order Regulative rules Binding expectations Constitutive schemes Mechanisms Coercive Normative Mimetic Logic Instrumentality Appropriateness Orthodoxy Indicators Rules Laws Sanctions Certification Accreditation Common beliefs Shared logics of action Basis of legitimacy Legally sanctioned Morally governed Comprehensible Recognizable Culturally supported 3 Pillars of Sociological Institutions Dick Scott defined institutions as “multifaceted, durable social structures, made up of symbolic elements, social activities, and material resources. … They are relatively resistant to change.” His typology comprised 3 pillars:

7. Org’l Myths & Ceremonies Orgs mirror societal conventions, playing lip-service to dominant values & norms. A loose-coupling occurs between org’l facades & operational cores, e.g., bureaucratic schools wherein classroom anarchy prevails. Organizational field members develop shared meaning systems, a consensus about desired qualities, values, and behaviors. Institutionalizing common understandings requires that “social processes, obligations, or actualities come to take on a rule-like status in social thought and action” (John Meyer & Brian Rowan 1977:341). Symbolic meanings are embedded into formal structures and routine practices permeating everyday org’l life. Institutionalized routines often exhibit faddish, ritualistic, ceremonial & mythic elements largely unrelated to rational efficiency or effectiveness (DMV “red tape,” UM cap-and-gown rites). Organizational structures and practices persist as traditional customs and habits, regardless of their rationality, but simply because plausible alternatives to traditions grow unthinkable. “In other words, institutionalized acts are done for no other reason than that is how things are done” (Pfeffer 1982:240).

8. Mechanisms of Isomorphism Citation classic by Paul DiMaggio & Woody Powell (1983) proposed three mechanisms generating isomorphic conformity (convergence around a single form), thereby reducing variation within industries & org’l fields. ☼ Coercive isomorphismstems from political influences and cultural expectations ☼ Mimesisarises in uncertainties leading to imitation of apparently successful forms  ☼ Normative pressuresoriginate in occupational communities & professional assns Causal ambiguities about org’l performance – especially in government & nonprofit sectors, but even in business – promote a slavish mimicry in the diffusion & adoption of the hottest management fads & fashions: Taylorism, M-form, Human Relations, Matrix, Theory Z, TQM, ISO, BPR, etc. ad nauseum.

9. Institutionalized Market Hazards Wayne Baker & colleagues modeled markets as intertemporal processes which integrate theories of competition, power, and institutional forces. EHA market ties of 1,644 advertising agencies & clients found informal exchange rules institutionalized in emergence of the ad-services market: exclusivity (sole-source) and loyalty (infrequent agency switching). Altho most institutional forces reduce the risk of breaking agency-client ties, competition increases it. Powerful agencies mobilize resources to increase tie stability, but powerful clients mobilize resources to increase or decrease stability. This market is imperfectly institutionalized as repeated patterns of exchange, because competition and changing norms about the duration of market ties destabilize market relationships. • An illegal price-fixing cartel in the U.S. electrical industry relied on the social structure of committee meetings to ameliorate its members’ competitive difficulties in the market: • Cartel continuity was responsive to market conditions that favored a cartel’s formation. • Centralization of the cartel’s authority in decision making resulted in more effective collusive pricing.

10. Stock Market as Institution Stock & financial markets are social institutions, not just efficient arenas to raise capital and set share prices by supply-&-demand exchanges. “…nearly all sociological research on money, financial markets, and banking at least implicitly assumes that financial relations are social relations. ... Rather it suggests that sociologists can (and do) usefully inform studies of a subject most often associated with another discipline. … [They] usefully extend knowledge about social interaction developed in other subfields of the discipline to improve understanding of banking and finance.” (Lisa Keister 2002:53) Analysts should try to identify the conditions where the institutional rules of a financial market are “followed, not followed, transgressed, or transformed.” H: When uncertainty is high, actors deal with trusted past partners to avoid malfeasance and opportunism H: They access partners’ networks to obtain reliable information about potential partner trustworthiness

11. Stock Market as Social Construction Institutionalists depict stock market behaviors as socially constructed, in contrast to mainstream economics’ view of market’s efficient rationality. Zajac & Westphal (2004) suggested that market reactions to stock repurchase plans were influenced by the mid-1980s U.S. emergence of the agency perspective on corporate governance. This powerful new institutional logic led the market to reverse its prior negative reaction to repurchase plans. They proposed competing hypotheses about how the market value of these policies might have increased as more firms formally adopted, but did not implement, the stock repurchase plans over time. Zajac & Westphal posited that institutionalization processes could increase the collective appraisal of the policy’s market value as more and more firms adopt it (mimesis), despite the growing evidence of insitutionalized decoupling. In contrast, neoclassical economics predicts that markets should discount a policy’s value when evidence accumulates of nonimplementation. Ezra Zuckerman (2004) criticized Z&W’s quick dismissal of orthodox economic explanations. Sociologists “would do well to consider and incorporate in some way” the economists’ intuitions into the social construction of financial markets.

12. Discussion Quex • Can Hodgson’s four defining characteristics of institutional economics distinguish OEI from NEI? Where does the new sociological institutionalism fit into this picture? • Give some examples of “reconstitutive downward causation” from institutions to individuals & also the reverse causal direction. • “How do we explain this lack of co-operation” (Velthuis) between new economic sociology and institutional economics? Was Talcott Parsons really to blame? • What would you propose as an appropriate division of academic labor between sociology & economics? • How useful is Ingram & Clay’s 2x2 classification of institutional forms (public/private, centralized/decentralized) for theorizing about choice-within-constraints? How can we go about building a “better theory about private decentralized institutions”? • Many critics fault institutionalism for its static, conservative biases. What elements should be included in a theory of institutional change and evolution? • How could Granovetter’s imperialistic ambitions (hubris?) best be achieved – to replace the neoclassical economic explanation with an alternative socially constructed framework for understanding economic actions?

13. References Baker, Wayne E., Robert R Faulkner and Gene A. Fisher. 1998. “Hazards of the Market: The Continuity and Dissolution of Interorganizational Market Relationships.” American Sociological Review 63:147-177. DiMaggio, Paul and Walter Powell. 1983. “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields.” American Sociological Review 48:147-160. Faulkner, Robert R., Eric R. Cheney, Gene A. Fisher and Wayne E. Baker. 2002. “Crime by Committee: Conspirators and Company Men in the Illegal Electrical Industry Cartel, 1954-1959.” Criminology 41:511-554. Keister, Lisa. 2002. “Financial Markets, Money, and Banking.” Annual Review of Sociology 28:39-61. Meyer, John W. and Brian Rowan. 1977. “Institutionalized Organizations: Formal Structure as Myth and Ceremony.” American Journal of Sociology 83:340-363. Scott, W. Richard. 2001. Institutions and Organizations, Second Edition. Thousand Oaks, CA: Sage Publications. Zajac, Edward J. and James D. Westphal. 2004. “Should Sociological Theories Venture into ‘Economic Territory?’ Yes!” American Sociological Review 69(3):466-471. Zajac, Edward J. and James D. Westphal. 2004. “The Social Construction of Market Value: Institutionalization and Learning Perspectives on Stock Market Reactions.” American Sociological Review 69:433-457. Zuckerman, Ezra W. 2004. 2004. “Towards the Social Reconstruction of an Interdisciplinary Turf War.” American Sociological Review 69:458-465.