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The Difference Between Social Facts, Norms, and Institutions and Their Associated Rules and Enforcement

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The Difference Between Social Facts, Norms, and Institutions and Their Associated Rules and Enforcement What Institutions Are: The difference between Social Facts, Norms, and Institutions and their associated rules and enforcement November 2017 John Joseph Wallis University of Maryland, NBER, and CEPR This paper is a heavily revised version of “The Difference Between Norms and Institutions.” Price Fishback, Peter Murrell, and Chris Morris gave me extremely valuable and detailed comments on the early draft. The graduate students in my ECON 613 class Spring 2016 and ECON 611 class in spring of 2017 were very constructive, useful, and patient, particularly Carlos Eduardo V. Van Hombeeck, Mateo Uribe-Castro, Matt Staiger, Hao Bao, Fernando Saltiel, and Burak Turkgulu. Conversations with Eric Alston, Lee Alston, Tom Nonnemacher and Naomi Lamoreaux were very helpful as well. Felipe Saffie gave me a set of enormously helpful suggestions on earlier drafts. The paper is still too long, and there is too much repetition of ideas. My apologies. “Institutions are the rules of the game of a society or more formally are the humanly devised constraints that structure human interaction. They are composed of formal rules (statute law, common law, regulations), informal constraints (conventions, norms of behavior, and self imposed rules of behavior); and the enforcement characteristics of both.” (North 1992, p. 4). Part I: Section 1: Institutions, Norms, and Social Facts For over a century, institutions have played a central role in how the social sciences, philosophy, and history think about how societies work. Although they had been studied for millennia, institutions became a social phenomena of particular interest in the late 19th century as social scientists began to articulate the logic of neo-classical economics. One strand of institutional theory defined institutions as deliberate attempts by groups of people (ranging from families to nations) to form agreements about how they relate to one another. This approach built on existing ideas about law and the state. The agreed upon rules are North’s “humanely devised” constraints that attempt to structure human interaction and intuitively are the rules of the game. A second, broader approach to institutions also developed where any repeated pattern of human behavior could become “institutionalized.” Faced with repeated patterns, individuals come to expect certain behavior to occur and develop expectations, beliefs, and even values about how the world should and does behave. Patterns exist at all levels of society, from families, to firms, to communities, and to nations. These expectations, beliefs, and values affect the choices individuals make, and thus the patterns that we live among. Institutions, therefore, are patterns of behavior among families, groups, tribes, states, or nations that persist. The broad approach has a long tradition in sociology associated with Talcott Parsons and his students. 1 Recently these ideas have been sharpened analytically in philisophy and economics by the “institutions-as-equilibria” approach of Lewis, Sugden, Grief, and others. The tension between the two approaches has persisted over a century or more. Social scientists face two questions: why do individuals make the choices they make, and why do individuals face the choices they face? The neoclassical economic theory developed in the second half of the 19th century solved both problems simultaneously by making a simplifying set of assumption. Tastes, preferences, technology, resources, and “other things” were assumed to be constant. The choices individuals make to produce or consume result in interactions in the larger society that generate relative prices. Relative prices are beyond the control of individuals, they frame the choices people face, but nonetheless they are the aggregate result of individual choices. Relative prices are a “social fact:” a result of individual choices that constrain the choice that all individuals face. Neoclassical economics provided a neat, powerful, but limited solution to understanding how the choices individuals make individually shape the choices that all individuals face collectively. The late 19th century focus on the limits of the neoclassical model gave a particular flavor to institutional social science. Institutions could be broadly defined as the tastes, preferences, and “other things” that the neoclassical model left out by assuming they were constant for the purpose of analysis This flavor lent itself to a broad approach and a big tent community of scholars working on institutions using very different concepts and methods. Yet the urge to develop a unifying theory of institutions and institutional change has proven irresistible. North’s definition deliberately bridged the broad and narrow approaches to institutions. North and Avner Greif were two leading economists pushing towards a unifying theory of institutions that united 2 the choices individuals make with the choices that individuals face. But the field of institutional studies, including economics, political science, sociology, and philosophy continued to include a grab bag of conflicting definitions and approaches. Recent theoretical advances have pushed question of what institutions are back to the forefront of the debate in institutional social science. Not surprisingly, the theoretical development links choices that individuals make to the choices individuals face. The philosopher David Lewis’s beautiful book on Convention lays out one logic. People drive cars and can be seriously injured when cars collide. Which side of the road should people drive on? If enough people start driving on the right, and enough people believe that most people will drive on the right, then the convention of driving on the right can become self-enforcing. The choices people make to drive on one side of the road or the other, can produce patterns of behavior such that the choices individuals face, literally oncoming traffic on the right or the left, come with such distinctly different costs and benefits that almost everyone makes the same choice, thus reinforcing the pattern of behavior and the behavioral rule individuals infer from the behavior. Lewis’s ideas were based in game theoretical concepts being widely applied in the 1980s and 1990s to a wide range of problems in the social sciences. These ideas coalesced into the “institutions as equilibria” approach that examines and explains why patterns of behavior can be self-enforcing. In contrast, “institutions as rules” takes the institutions defined as the rules of the game ala North does not explain why specific institutional rules are self-enforcing. In fact, the institutions as rules approach must cope with the fact that many agreed upon rules are created and then apparently not enforced. This paper is not concerned with whether the institutions as equilibria or institutions as rules approach is correct, since they both right and important. 3 What comprises the universe of things we call institutions and what, if anything, do the share as social processes that makes them institutions? This is an older and deeper problem than the equilibria vs. rules debate. Until we answer it we cannot know whether it possible to devise a comprehensive theory of institutions and a theory of institutional change. If norms, as patterns of behavior, and institutions as agreed upon rules are fundamentally different social processes, inherently different in their nature, then attempts to integrate a theory of institutions that includes norms and institutional rules under the same logic is bound to fail. What they have in common is not essential to what they are. It is as if a pair of fraternal twins, not quite identical but assumed to share different mixes of the same genetic material, find out later in life with the advent of genetic testing, that they are children of the same mother but different fathers. Related, but fundamentally different. The first part of the paper lays out the fundamentally different nature of institutions and norms, and explains their essential logics. In light of their fundamental differences, the second part of the paper investigates aspects of institutions that have been obscured by equation of norms with institutions, and the places them in relationship to each other. Institutions are comprised of “agreed upon rules,” what North called humanly devised constraints and Commons (1931) called “collective action in control, liberation and expansion of individual action.” Agreed upon rules require at least two people and are inherently external to the individuals involved in the agreement. Norms are patterns of behavior that give rise to “behavioral rules.” Behavioral rules are the inferences that individuals make about the consequences of their choices in light of how they believe other people will respond. In Lewis example of conventions, people drive on the right 4 side of the road because they believe others will and if they drive on the left side the consequences will be serious. Behavioral rules are internal to individuals. Behavioral equilibria arise when the actions of individuals reinforce the pattern of behavior around them, and so behavioral norms are always patterns of behavior. If people do not individually and internally evaluate the behavior and then decide to act in a way that conforms to the pattern, there will be no pattern. In contrast, individuals and organizations often devote substantial time and resources to agreed upon rules that are then not followed in practice. What does enforcement mean if agreed upon rules are clearly stated and
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