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What is an Institution: Part 1

This is Part 1 of a two-part series covering the definition, health, and evolution of institutions.

The word “institution” commonly appears in social science literature. While I would venture that you have some idea concerning what constitutes an institution, I would also guess that different readers hold different conceptions in their own minds. More than likely, you are familiar with the idea that the government is an institution or that it is comprised of many institutions. Those more familiar with the subject may think of institutions as rules and norms that we submit to in the course of social interaction. While any one of these is not an incorrect way of thinking about institutions, we would be better served by formulating a definition that includes all of these.

When it comes to policy, institutions are both the means and what is at stake. Citizens vote for or against propositions and certain politicians in hopes that laws and the structure of government transform according to their preferences. Initiatives and court cases across the country have attempted to change or affirm the legality of gay marriage, medical marijuana, abortion, among many other issues. In this regard, we have observed a tremendous transformation of institutions over the past few generations.

While these examples demonstrate how institutions enable or impinge our ability to perform certain tasks, they do not help us to transform our understanding of institutions into something more precise.

In the most general sense, we can think of institutions as coordination devices. Institutions help us to predict the actions of others in particular situations. They also help us to make predictions about the effects of our own actions. For example, there often exists an informal institution that, on crowded sidewalks, one should walk on the right-hand side. While there is no official enforcement of this rule, one who violates it may face a wall of opposing foot traffic.

We refer to institutions at this informal level as norms, customs, or traditions. These are typically non-binding rules and strategies, such as the practice of standing at least one to two feet away from a conversation partner.

Though more complex, we can include language in this category – not language as a codified system, but language as it develops in conversation. A language is composed of a set of words and rules concerning the meaning of those words in light of their context. In fact, language is the archetypal institution.

We can think of formal institutions as those institutions that have been codified. They may be supported by the force of law or some other well-defined system of rewards and punishments. Often, formal institutions explicitly denote a hierarchical structure of offices, each subject to particular rights and obligations. A non-exhaustive list of institutions includes firms, religious organizations, systems of governance, and systems of property rights.

In each of these formal institutions, different categories of actors are subject to different sets of expectations. If I am a CEO, I have the right to make decisions that will significantly impact the operations of the company that I serve. I also have a duty to fulfill concerning the profitability of the company under my leadership. Compare this to a lower level employee who, for the most part, completes tasks in the manner that he is assigned them.

Institutions are not static entities. The structure of institutions and the roles that comprise them are subject to change over time. In part II, we will consider the nature of and motivation for institutional transformation.

Part 2 >>


Meet the Author

James Caton is a fellow at the Center for the Study of Public Choice and Private Enterprise (PCPE) and an assistant professor in the NDSU Department of Agribusiness and Applied Economics. Read his bio.

james.caton@ndsu.edu


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James Caton   Economic Principles   Institutions


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