Sect, WR. Cao) Sivtindyare ord deren. Gaye FoMterathons, bee Angels Cop i—an), (4” Edaten [ 1% ape ) | Early Institutionalists oe & . - . Human beings do not pursue the course of their daily lives and perform the complicated actions of social life merely as automata conforming to the institutions and customs into which they have been born. There remains a vast field of study in the ideas, beliefs, emotions, and sentiments which act as the immediate motives of these actions. —W. H. R. Rivers (1914, Vol. 2: 595) © attempt is made here to provide a comprehensive or thorough review of early institutional theory, but to completely neglect these ideas and arguments would be inexcusable. The beginning of wisdom for an institutional theorist is the recognition that current actors and events are greatly shaped by past efforts and their enduring products. What we refer to as the “present” context is the residue of the work of those who came before. Although some of the concerns of early institutionalists differ from today’s agenda, a surprising number of contemporary ideas represent rediscoveries or recastings of the work of our intellectual forefathers and -mothers. In reviewing this early work, it is good to recognize that contem- porary students bring their own interests and concerns to the reading 1 °2 INSTITUTIONS AND ORGANIZATIONS. of these texts. As Alexander (1983, Vol. 1: 119) observes: ““Reading’ is an important part of any theoretical strategy, and if the work in ques- tion is in any way open to varied interpretation then it certainly will be so interpreted.” Conflicting interpretations are even more likely when the theorists in question change their views over time—so that, for example, there appears to be an “early” Durkheim and a “late” one—or when, like Weber, they simultaneously express contradictory or ambiv- alent views. Somewhat arbitrarily, I sort the work into disciplinary categor although, as will soon become apparent, greater divisions exist within than between disciplinary camps—and briefly review leading contrib- utors to institutional thought from the late 19th to the mid-20th century in economics, political science, and sociology. “EARLY INSTITUTIONAL THEORY IN ECONOMICS European Quarrels Itis good at the outset to acknowledge the lack of logical coherence in the strands of work to be examined. In many respects, the “old” institutional economics bears a stronger intellectual kinship with the “new” institutional approaches advanced by sociologists and organiza tional scholars than to the “new” institutional economics. Conversely, the “new” institutional economics is more indebted to the critics of “old” institutional economics than to their early namesakes. The earli- est institutional arguments arose in Germany and Austria in the late 19th century as one by-product of the famous Methodenstreit: a debate over scientific method in the social sciences. Drawing energy and inspi- ration from the earlier Romantic movement as well as from the ideas of Kant and Hegel, a collection of economists challenged the conventional cannon positing that economics could be reduced to a set of universal laws. Led by Gustav Schmoller (1900-1904), this Historical School insisted that economic processes operate within a social framework that is in turn shaped by a set of cultural and historical forces. Histori- cal and comparative research was required to discern the distinctive properties of particular economic systems. Moreover, Schmoller and his associates called for economics to eschew its simplistic assumptions regarding “economic man” and embrace more realistic models of human behavior, The principal defender of the classical approach in this debate was Carl Menger (1883/1963), the Viennese economist, who insisted on theEarly Institutionalists 3 utility of simplifying assumptions and the value of developing eco- nomic principles that were both abstract and timeless. Rather than denying the importance of broader societal institutional forces, Menger argued that institutions were themselves social phenomena in need of theoretical explanation. It is for this reason that Langlois (1986a: 5) concludes that Menger “has perhaps more claim to be the patron saint of the new institutional economics than has any of the original institutionalists.” As with many intellectual debates, the warring factions each sharpened and perfected their arguments, but neither succeeded in convincing the other. Attempts at reconciliation and synthesis occurred only among scholars of a later generation—principally in the work of Weber, to be discussed later. American Institutional Economists Many of the ideas of the Historical School were embraced and further developed by American institutional economists, a number of whom were trained in Germany. An earlier cohort working in the mid- 19th century did not receive much attention, but by the turn of the century, three institutional economists had become quite influential: Thorstein Veblen, John Commons, and Westley Mitchell. While there were important differences in their views, all criticized conventional economic models for their unrealistic assumptions and inattention to historical change. The focus of Veblen’s work was on economic change, but he did not embrace the German Historical School, which he believed was inappropriately satisfied with developing a narrative account of indus- trial and capitalist development. Rather, he distanced himself both from this group and from neoclassical economists by insisting that economics must offer a theory of economic change that embraced a realistic model of individual actors and based their theories on dynamic rather than static models of the economy /society. Veblen was highly critical of the underlying economic assump- tions regarding individual behavior. He ridiculed “the hedonistic conception of man as that of a lightning calculator of pleasures and pain” (Veblen 1898: 398). Instead, he insisted that much behavior was governed by habit and convention. “Not only is the individual’s conduct edged about and directed by his habitual relations to his fel- lows in the group, but these relations, being of an institutional charac- ter, vary as the institutional scene varies” (Veblen 1909: 245). Indeed,4 INSTITUTIONS AND ORGANIZATIONS Veblen (1919: 239) defined institutions as “settled habits of thought common to the generality of man.” He embraced the pragmatic con- ception of individuals as knowing actors seeking “self-realization and expression in an unfolding activity” immersed in ongoing social envi- ronments (Veblen 1919: 74), ‘At the same time, Veblen (1898) insisted that economics should reorient itself as an evolutionary science, moving away from its taxo- nomic approach that viewed equilibrium as the normal state. He called for the creation of a science of cumulative causation. Also, like Marx, as discussed later, Veblen viewed much of the dynamism of the economy as driven by a set of internal contradictions—in Veblen’s case, between the industrial system focusing on technology, production, and coordi- nation on the one hand, and the business system with its emphasis on acquisition, competition, consumption, and marketing on the other. Veblen was critical of the tendencies of the business systems of econo- mies, including speculation in financial markets, which he regarded as “inherently wasteful and detrimental to the community” (Hamilton and Petrovic 2009: 357). Like Veblen, Commons (1924: 7) challenged the conventional emphasis in neoclassical economics on individual choice behavior, sug- gesting that a more appropriate unit of economic analysis was the transaction, a concept borrowed from legal analysis. “The transaction is two or more wills giving, taking, persuading, coercing, defrauding, commanding, obeying, competing, governing, in a world of scarcity, mechanisms and rules of conduct” (Commons 1924: 7). The “rules of conduct” to which Commons alludes are social institutions. Institu- tional rules were necessary to define the limits within which individu- als and firms could pursue their objectives (Commons 1950/1970). To Commons, the institutions existing at a specific time represent nothing more than imperfect and pragmatic solutions to reconcile past conflicts; they are solutions that consist of a set of rights and duties, an authority for enforcing them, and some degree of adher- ence to collective norms of prudent reasonable behavior (Van de Ven 1993; 142). Alll three institutional economists emphasized the importance of change and were critical of their colleagues for not making its exami- nation central to their work. Veblen embraced an evolutionary perspec- tive and insisted that a valid economics would emphasize the role of technological change and trace the changing phases of the economy. Commons likewise stressed the centrality of change, viewing the economy as “a moving, changing process” (Commons 1924: 376) and the firm as a “going concern” (Ansell 2009: 474). Mitchell believedEarly Institutionalists 5 that conventional economics was a hindrance to understanding the nature of the business cycle, and he devoted much of his energies to studying economic change. Like most institutionalists (except for some varieties of rational choice scholars), he was reluctant to embrace an assumption of economic equilibrium. As one of the founders of the National Bureau of Economic Research and chair of the committee that published the voluminous report Recent Social Trends (President's Research Committee on Social Trends 1934), Mitchell pioneered the collection of empirical data on the operation of the economy and its ramifications in multiple sectors, insisting that economic principles should be grounded in facts, not solely in abstract, deductive theories. The American institutionalists, particularly Veblen and Commons, were influenced not only by the German Historical School but also by the homegrown philosophy of pragmatism as espoused by John Dewey, William James, Charles Peirce, and others (Menand 1997). The central premise underlying pragmatist approaches is the utility of viewing human action as efforts by individuals to behave in sensible and purposeful ways within historical social contexts. We amplify these views in Chapter 3. Jacoby (1990) argues that the approaches offered by the early insti- tutionalists departed from those adopted by their mainstream, neoclas- sical colleagues in four important respects: © Indeterminancy vs. determinancy. While the orthodox model assumed “perfect competition and unique equilibria, the institu- tionalists pointed to pervasive market power and to indetermi- nacy even under competition” (p. 318). © Endogenous vs. exogenous determination of preferences. Neoclassical theorists posited individual preferences or wants, while institu- tionalists argued that such preferences were shaped by social institutions, whose operation should be the subject of economic analysis. © Behavioral realism vs. simplifying assumptions. Institutional theo- rists argued that economists should use more pragmatic and psychologically realistic models of economic motivation rather than subscribe to naive utilitarian assumptions * Diachronic vs. synchronic analysis, Rather than assuming the “timeless and placeless” assumptions of the neoclassical theo- tists, institutionalists insisted that economists should ascertain “how the economy acquired its features and the conditions that cause these features to vary over time and place” (p. 320).!6 _ INSTITUTIONS AND ORGANIZATIONS Regardless of whether they were correct in their accusations and assertions, the early institutional economists did not prevail within the discipline of economics: Neoclassical theory was victorious and contin- ues its dominance up to the present time. Prior to the rise of the new institutional economics in the 1970s, only a few economists attempted to carry forward the institutionalists’ agenda, the best known of whom. are J. A, Schumpeter, Karl Polanyi, John Kenneth Galbraith, and Gunnar Myrdal (sce Swedberg 1991). Arguably, the subfields of economics most affected by the legacy of the institutional theorists are those of labor economics, the field in which Commons specialized; industrial relations, which focuses on broader social and political factors affecting, economic structures and processes; and the economics of industry, which examines the varying configurations of industrial structures and their effects on the strategies and performance of individual firms. Why was the impact of the early institutionalists blunted? Modern- day commentators offer several explanations. The German Historical School no doubt overemphasized the uniqueness of economic systems and underemphasized the value of analytic theory. Even sympathetic critics acknowledge that Veblen exhibited “an explicit hostility to intel- lectual ‘symmetry and system-building’” (Hodgson 1991: 211) and that Commons’ arguments were hampered by his “idiosyncratic terminol- ogy and unsystematic style of reasoning” (Vanberg 1989: 343). But a more serious shortcoming was the tendency for the work to degenerate into naive empiricism and historicism. Emphasizing the importance of the particular, of time and place and historical circumstance, institu- tional analysis came more and more to underline “the value of largely descriptive work on the nature and function of politico-economic insti- tutions” (Hodgson 1991: 211). Here then, we have the principal reason why the godfather of the “new” institutional economics, Ronald Coase (1983: 230), so cavalierly dismissed the “old” institutional economics: “Without a theory they had nothing to pass on except a mass of descriptive material waiting for a theory, ora fire.” The battle between the particular and the general, between the temporal and the timeless is one that contemporary institutional theo- rists continue to confront. ** EARLY INSTITUTIONAL THEORY IN POLITICAL SCIENCE Institutional approaches dominated political science in both Europe and America during the latter half of the 19th century and the first twoEarly Institutionalists 7 decades of the 20th century. I concentrate on the American scene, but first call attention to the work of a well-known but neglected student of institutions and organizations: Alexis de Tocqueville. Living in pre- revolutionary France in the mid-19th century, Tocqueville took advan- tage of an opportunity to visit the United States in the early 1830s ostensibly to study prison systems but primarily because he wanted to observe firsthand the emergence of a fledgling democracy (Brogan 2006). Tocqueville is best known for his study of the contribution of voluntary associations to American democracy, but considered more broadly his writings may be seen as an important early instance of the analysis of organizations operating under diverse institutional contexts (Swedberg 2009) as well as the relation between culture and institu- tions under equilibrium/disequilibrium conditions (Meyer 2003). Tocqueville distinguished between institutions, primarily laws but including associated routines and habits, and moeurs (“mores”), refer- ring to norms, attitudes, and opinions. In his study of French aristocracy before the revolution, Tocqueville argues that the state’s emphasis on institutions prevented them from noting the extent to which mores had departed from and no longer supported law. It was only the revolution of 1789 that brought these state/societal frameworks closer together. The concentration of power in the state, Tocqueville argues, made citi- zens so reliant on state action that they forgot how to form associations to pursue their own interests (Tocqueville 1856/1998, 2001). By contrast, as Tocqueville famously pointed out, the weakness of the state during the 19th century in America created the environment within which a robust collection of bottom-up movements and associations emerged, comprising an active civic sector (Tocqueville 1835/2004), In contrast to this relatively sophisticated use of comparative ins tutional analysis, American political scientists, such as J. W. Burgess (1902), Woodrow Wilson (1889), and W. W. Willoughby (1896; 1904), pursued a more straightforward approach grounded in constitutional law and moral philosophy. In the heavy tomes produced by these scholars, careful attention was given to the legal framework and administrative arrangements characterizing particular governance (primarily nation-state) structures. Much of the work involved pains- taking historical examination of the origins, controversies, and com- promises producing specific regimes; some analyses were explicitly comparative, detailing how central problems or functions were vari- ously managed by diverse governance mechanisms, But the underly- ing tone of the work was normative: “In the mainstream of political science, description was overshadowed by moral philosophy” (Simon 1991: 57).8 INSTITUTIONS AND ORGANIZATIONS. As depicted by Bill and Hardgrave (1981; see also Peters 1999), the institutional school that developed at the turn of the 20th century exhibited several defining features. First, it was preoccupied with formal structures and legal systems. “Emphasis was placed upon the orga- nized and evident institutions of government, and studies concen- trated almost exclusively upon constitutions, cabinets, parliaments, courts, and bureaucracies” (Bill and Hardgrave 1981: 3). Second, the approach emphasized detailed accounts of particular political systems, resulting in “configurative description”—intricate descriptive accounts of interlinked rules, rights, and procedures (Bill and Hardgrave 1981 Third, the approach was conservative in the sense that it emphasized origins but not ongoing change. “Political institutions were examined in terms of an evolutionary development which found fulfillment in the immediate present. But while these institutions had a past, they apparently had no future” (p. 6). They were regarded as completed products. Fourth, the work was largely nontheoretical, primary atten- tion being given to historical reconstruction of specific institutional forms. Finally, the tone of these studies was more that associated with moral philosophy and less that of empirical science. These scholars devoted more attention to the explication of normative principles than to the formulation of testable propositions. Although he acknowledges many of the same characteristics, Eckstein (1963) also insists that these early institutionalists did usher in the first crude form of positivism in political science. Unlike their own predecessors, primarily “historicists” who focused their interest on abstracted political systems derived from philosophical principles, they were looking at the real world, at hard facts: Primitive, unadulterated positivism insists upon hard facts, indubitable and incontrovertible facts, as well as facts that speak for themselves—and what facts of politics are harder, as well as more self-explanatory than the facts found in formal legal codes? (Eckstein 1963: 10) In addition, these scholars attended to the real world in yet another sense: They placed great emphasis on formal political institutions, on charters, legal codes, and administrative rules, in part because “the nineteenth century was a great age of constitution-making” (Eckstein 1963: 10). Beginning during the mid-1930s and continuing through the 1960s, the institutional perspective was challenged and largely supplanted by the behavioralist approach (not to be confused with behaviorism in