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«Inaugural-Dissertation zur Erlangung des Doktorgrades des Fachbereichs Wirtschaftswissenschaften der Johann-Wolfgang Goethe-Universität Frankfurt am ...»

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ginate in markets. Durkheim defined economic institutions in relation to the production of wealth from serfdom through tenant farming to corporate organization and factory production, in relation to exchange in markets or stock markets, and in relation to the distribution of rent, interest and salaries which together form the content of economic sociology.65 Institutions are social facts that exist ―apart from and beyond the choosing of those subject to it‖ as such ―constraining external reality that they are not in principle free to adopt, reject, or change‖. Consequently, Arthur Stinchcombe conceives this definition as being in contrast with the Old Institutionalism in which people built and ran institutions. In what he calls ―the new Durkheimian Institutionalism‖ collective representations operate on their own.66 It is in the public interest that actors abide by institutionalized obligations, that sanctions are imposed, and that order is established by a third party, hence providing government.67 Durkheim was interested in the non-contractual elements of private contracts, which he considered to be the indispensable obligatory fundamentals of liberal voluntarism.68 Markets are constituted by contracts, and these usually consist of agreements about future performance. This means that the non-contractual components of contracts are essential, since expectations of the other party‘s future behavior depend on predictions about both parties‘ future morality.69 Durkheim also conceived symbolic systems, such as those of belief, knowledge and moral authority, to be social institutions.70 He therefore considered society to be a precondition for the conclusion of competitive contracts, not as their product.71 In contrast, Williamsonian institutions are based on voluntary private contracts between partners, not on public constitutional processes. These rational contracts are designed to make transactions optimally efficient, and are thus economic in nature. They are devices that develop out of private market relations and hence create ―nonmarket though marketresponsive and indeed market-driven coordination of economic behavior‖. They consist of ―private hierarchies of Coasian firms‖ such as trade associations, subcontracting networks and cartels and aim to lower transaction costs below market exchange costs, offering governance through self-enforcement.72 Durkheim, 1978 [1909], p. 80, Smelser and Swedberg, 2005, p. 10f.

Stinchcombe, 1997, p. 2.

Streeck, 2009a, p. 154ff. Similar in Streeck, 2010a, p. 17f. and Streeck, 2009b, p. 25f.

Durkheim, 1949 [1893], book 1, chapter 7, Streeck, 2009a, p. 156.

Stinchcombe, 1997, p. 10.

Scott, 2008, p. 13.

Streeck, 2010a, p. 17f.

Streeck, 2009a, p. 154ff., Streeck, 2010a, p. 17f.

Durkheimian and Williamsonian institutions are in dialectical conflict since they are respectively obligatory and voluntaristic, or historically inherited and freely contracted;

they represent two types of social order, one public and one private.73 Yet another approach to institutions comes from ‗old‘ American Institutionalism for which institutions also play a vital role in the everyday life of human beings. Institutions are here defined not only as formal organizations, but also as ―socially habituated behavior‖ similar to North‘s definition of informal constraints.74 A ‗society‘ within this line of thought can be defined as a set of institutional systems which themselves can be thought of as sets of institutions. An institution in this sense can be characterized as ―a set of socially prescribed patterns of correlated behavior‖.75 Thus, an institution is what Commons calls ―collective action‖ in control, liberation and expansion of individual action.76 It is a way of thought with a permanent character, embedded in the habits of a group. Institutions guide, but at the same time constrain, individual behavior. Decisions are always made in the context of a specific institutional environment. In other words, institutions are always linked to specific cultural values. Therefore it is important to study institutions as an explanation of economic development. American Institutionalism ―focus(es) on the institutions of economic and social life and promote(s) modes of analysis that center on the structured relations and transactions between individuals‖.77 The main task of institutionalism is its contribution to a better understanding of the role of institutions for economic decisions, and through this to understand economic environments.

Additionally, institutionalists claim that individuals are only part of a greater whole, and this whole is more than the sum of its parts. Institutions are defined as a ‗going concern‘ ―which engages in a series of transactions within the guidelines of a set of working rules‖.78 Individuals are at the same time part and product of those going concerns. They are situated in a specific cultural environment without given but constantly changing and adapting preference functions. That does not mean that the individual is not considered to be important, but she has to act within an institutional context, which in turn is part of a Streeck, 2009b, p. 25. For a comparison of North and Durkheim institutions please refer to Dallinger, 2007.

Hodgson, 1994, p. 64.

Bush, 1987, p. 1076.

Commons, 1931, p. 649.

Hodgson, 2005, p. ii.





Dugger, 1979, p. 901. In Dugger‘s terms ―[a] going concern refers to a corporation, a labor union, regulatory agency, stock exchange, and so forth‖, Dugger, 1977, p. 452f. Commons defines ‗going concerns‘ ―as developed by the courts‖ and as ―an adequate and relevant unit of investigation in economics. We were searching for a unit that would be more appropriate than the mechanistic, atomistic, or organic analogies from the physical sciences‖. Commons, 1950, p. 118.

specific cultural environment. Another important point is that individuals do not merely create institutions but are also affected by them, since both are in a relationship of mutual feedback.79 Hence for an American Institutionalist the individual cannot be the starting point of theoretical reflection, because an institution guides individual behavior, forming the habits of individuals, and is also changed by succeeding generations of individuals.

For Thorstein Veblen, one of the major founders and protagonists of American Institutionalism, an institution is a set of norms and ideals which is imperfectly reproduced or internalized through habituation.80 Veblen defines institutions as ―cultural products‖ and ―element of the cultural fabric‖.81 Also ―[t]hey are principles of action which underlie the current, business-like scheme of economic life, and as such, as practical grounds of conduct, they are not to be called in question without questioning the existing law and order….[M]en order their lives by these principles and, practically, entertain no question of their stability and finality. That is what is meant by calling them institutions; they are settled habits of thought common to the generality of men‖.82 Individuals cannot choose freely, but are confronted with certain constraints imposed upon them by their institutional environment, limiting their available alternatives. Institutions are also supposed to be stable over a period of time, and therefore contribute to the stabilization of individual behavior.

However, the ‗idle curiosity‘ of the individual still creates diversity and variation.83 Veblen connects this to the concept of culture. Culture is for him based on an institutional structure that develops and grows and is the product of habituation. The development of culture for Veblen is equal to a cumulation of, and accustomization to, habits that vary according to different environments. This is a continuous process that is never complete, because each change creates new situations requiring the adaptation of behavior and habits;

an argument which recalls the more modern theoretical analyses of institutional change described in 2.4. However, Veblen argues for path-dependent development as the past influences future variations, although of course he does not use this expression. He also argues that there are some underlying fundamentals of human nature which, despite constant gradual change, never alter.84 ―The wants and desires, the end and aim, the ways and Hodgson, 2000, p. 318, 325.

Veblen, 1964 [1899], p. 84 and 92.

Veblen, 1909, p. 621, 624.

Veblen, 1909, p. 626.

The term ‗idle curiosity‘ is often associated with Veblen‘s book The theory of the leisure class, but actually it appears in Veblen, 1906. For Veblen, ‗idle curiosity‘ is the way that scientific progress takes place.

Diggins, 1999, p. xxv, Veblen, 1964 [1899].

Veblen, 1909, p. 628.

means, the amplitude and drift of the individual's conduct are functions of an institutional variable that is of a highly complex and wholly unstable character‖.85 Economic institutions as specific type of institutions are the result of certain conventions and methods facilitating economic growth that develop over time.86 A degree of invariance is important if institutions are to be treated as units of analysis, but they of course cannot be immutable. Institutions display relative stability, but periods of continuity are disrupted by periods of crisis and rapid change. NIE treats such institutional change as mostly caused by external shocks. Change can also be caused by conflicts between institutions and routines. Due to the ‗idle curiosity‘ of men, technological change can come about. Technological change is treated as evolving and as a major force for economic development –contrasting with mainstream economics which takes technology as given. Individuals have a tendency toward experimentation and innovations, both of which constantly generate novelty. Changing habits cause frictions between old institutions, routines and the new customs, which in the end causes institutions to change to accommodate new conditions.87

2.3. American Institutionalism 2.3.1. The methodology of American Institutionalism As has already been indicated above, the major differences between institutionalism and mainstream economics turns on model-building, the unit of analysis and psychological perspective. As far as model building is concerned, institutionalism looks for pattern, holistic models, whereas mainstream economics takes a positivistic approach and therefore seeks to build predictive models. The two approaches differ also in their unit of analysis.

Mainstream economics assumes the maximizing individual consumer, whereas institutionalists look to institutions as the basis of their theories.

The third point of difference is the psychological perspective of the two approaches, namely behaviorism versus individualism. Institutionalists adhere to behaviorism because it is rooted in institutional structures for the explanation of human behavior. Institutional structures in this case are defined as norms, working rules or habits. There are no preconceptions or assumptions, and so individual preferences are seen to rely on the cultural and institutional environment of the individual. Individual preferences are considered to be Veblen, 1909, p. 629 Veblen, 1898, p. 392.

Wilber, 1978, p. 72, 78. Together with other approaches to institutional change, this Veblenian dichotomy between dynamic technology and static institutions will be discussed in chapter 2.4.

unreliable and of a highly subjective nature, and hence the milieu influencing the individual is thought to be the better starting point for analysis.88 Behaviorism relies on the observation of actual behavior within a specific institutional context. Analysis of human action has therefore always to start with scrutiny of this milieu. Individuals are not discounted, but are considered to be important since they are not only guided by their institutional environment, but they also continuously change the institutions surrounding them. This also places emphasis on different reactions under different conditions, dependent on time, space and history. Individuals are thus more than just the ―missing middle term in stimulusresponse psychology‖, and the explanation does not stop at a static description of observed behavior.89 But apart from these common points in explaining economic phenomena, there is hardly any shared body of theory found within institutional economics. Instead, it is more a way of investigation than a ―corpus of knowledge‖ which ties it together.90 Institutional economics is however in general based on evolutionary and holistic principles. It rejects formalism, rationalism and the positive/normative distinction used in mainstream economics because institutionalists regard these methods as failure to elucidate the nature of social reality. Reality is changed by economic processes which include power and conflict as central causalities. Conflict is caused by the technological change of social institutions (see also 2.4.). Humans act non-rationally and exhibit an appetite for power, adventure and independence, guided by altruism, custom, habit together with what, as mentioned before, Veblen calls ―idle curiosity‖, which contributes to technological change. These ‗variables‘ cannot be handled within formal models, but call for a different approach. For Veblen, institutionalists ―take as an (unavowed) postulate the fact of consecutive change. Their inquiry always centers upon some manner of process‖, and so Veblen‘s approach to economics is a narrative one.91 He and many of his successors focus on institutional change and the impact of institutions on the economy; he considers conceptualism rather than formalism which to be the best approach. Institutionalism provides a ―spectrum of acceptable alternatives from which individuals can choose‖.92 (American) Institutionalism argues that ―what survives organizationally may not be most efficient or effective, but it survives anyway because it has come to be instilled with Bush, 1987, p 1077f., Dugger, 1979, p. 903.

Dugger, 1979, p. 904.

Wilber, 1978, p. 73, similar in Samuels, 1995.

Veblen, 1908 as cited in: Dugger, 1977, p. 453.

Dugger, 1979, p. 905.

value in that specific institutional context‖.93 This challenges the view that institutions are designed and adopted for reasons of efficiency; instead "institutions are the expression of a political compromise".94

2.3.2. The analytical tools of American Institutionalism



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