What is an Institution: Part 2

Created by James Caton |

This is Part 2 of a two-part series covering the definition, health, and evolution of institutions.

Not all institutions are of equal quality. Institutions, when they are well-functioning, reflect the beliefs and integrate the desires of those who are subject to them. A government that fails to maintain the rights of its subjects is thought of as a tyranny. If factions begin to align against it, poor rule may foment a revolution. Likewise, a firm that fails to profitably provide goods and services has ceased to serve the interests of consumers, investors, or both. In a competitive market, it will soon face bankruptcy.

One way to better understand the role of institutions is to observe the effects of institutional failure.  A function of the government is to identify and implement legal constraints. Such legal constraints are themselves institutions. Here we will consider the nature and development of the rules of the road.

Consider the stop signs that you likely stopped at on your way to work or school in the last week. When you stopped, you probably considered whether or not another vehicle at the intersection had stopped before you did. At stop signs, a driver is supposed to allow those who were there before him to proceed before he does. A general respect for signs and the rules associated with them makes the roadway orderly and safe. These stop signs are part of a broader array of rules and symbols that facilitate order on the road. Obedience to these rules is ultimately enforced by police officers and the system of courts, institutions that operate adjacent the system of roads.

An institution may become dysfunctional if a change in context or rules unnecessarily impedes on the regular activity of those subject to the institution. What would happen if governments began to place stop signs in every direction at every intersection, even those where small roads intersect large ones?

If everyone respected these signs, we would expect that travel time would be significantly increased.  More than likely, drivers would begin to show less respect for stop signs, perhaps treating them as yield signs or failing to respond to them altogether. While it is safe to say that the existence of certain stop signs increase the rate of traffic flow, the existence of too many or not enough stop signs in busy areas may lead to a failure of the institution.

The stop sign functions as an institution because actors imbue it with shared or compatible meanings. We can understand this better if we imagine a path of institutional transformation with regard to the scenario where a stop sign is placed at every intersection. 

Before this event, drivers may hold perfectly to the rule that one must stop at every stop sign. After it, drivers may begin to treat stop signs as yield signs. If enough drivers begin to do this, it will become clear to participants and observers that the meaning of the stop sign has changed. This will happen without a command from a central coordinator.

Keeping with the subject of roads, we should not be surprised that a majority of vehicles violate official speed limits in areas where drivers deem the limit to be too low. Often, the official meaning of signs is at odds with the needs of drivers.

If officers begin to strictly enforce the formal interpretation – that vehicles must stop at a stop sign – despite the new interpretation – that vehicles need only yield at a stop sign – we can expect that the ability of these signs to facilitate the formation of expectations will be inhibited. If officers do succeed in maintaining the legal interpretation as the one that is obeyed by drivers, this will increase costs of enforcement and travel times.

From these examples, we see that institutions provide structure for plans and actions in a world of many actors. In a world with many actors, it is likely that plans would conflict absent the development of institutions like that of the stop sign. Most institutions are more complex than this as they consist of a greater number of rules. The logic, however, remains the same. As philosopher John Searle describes, institutions convey that:

X counts as Y in environment C

A stop sign (X) on the roadway (C) implies that I must stop momentarily (Y). Institutions are the rules of the road for social activity. Just as stop signs prevent vehicles from colliding, institutions allow us to make plans concerning our interaction with one other in ways that help avoid conflict. For this reason, we must exercise great caution as we engage in the process of institutional transformation.

<< Part 1

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.


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