On the Virtues of the Old Institutionalism Author(s): Arthur L. Stinchcombe Source: Annual Review of Sociology, Vol. 23 (1997), pp.

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Annu.Rev.Sociol. 1997.23:1-18 ? 1997byAnnual Copyright Reviews Inc. All rights reserved

ON THE VIRTUES OF THE OLD INSTITUTIONALISM

Arthur L. Stinchcombe
American Visiting Fellow, Bar Foundation, andPart-time Professor, Department of Northwestern Sociology, University, Illinois 60201 Evanston,
formal organization, competition, performance, contracts

KEY WORDS:

ABSTRACT Institutions arestaffed andarecreated to do the job ofregulating organizations. in financing, This staffing, and all thecreative work is involved that governing, institutional staff in organizations, has training, and motivating actions by that This staffing to theold been lostin recent institutional was central theorizing. which itlooked Theargument is exemplified is why institutionalism, so different. theinsights to thelegitimacy of court of classicalinstitutionalists by applying decisions as determined tothelegitimacy ofcompetition bythelaw ofevidence, ofother andthedestruction to thenoncontractual organizations bycompetition, incommitments basisofcontract tomaintain todo theperformances competence incontracts, required andtothe failure ofinstitutions ofcapitalist competition and ofmafia-like inpostcommunist thesubstitution enforcement ofcontracts Russia. The institutions ofthenewinstitutionalism do nothaveenough causalsubstance toexplain andenough variance ofcharacteristics suchvarious phenomena.

Introduction
I was recruitedinto sociology by the institutional economists, especially by ThorsteinVeblen; sociologists at CentralMichigan College of Education read Veblen, while economists there did not. I startedwith The Theory of the Leisure Class (1934 [1899]), and then whateverof the Veblen corpus was in the CMCE library.I went on beforegraduateschool to Karl Marx, Joseph Alois Schumpeter,and Max Weber,thenin graduateschool to JohnMaurice John R Commons,and manyhistorians of law (because most Clark,Clark Kerr, economic institutions eventuallymake theirway into the courts). I became a 1

0360-0572/97/0815-0001 $08.00

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sociologist in order to makea living as an institutional economist, sinceitwas I wouldmakea poorliving clearthat atthat among economists. My first intellectual identity, then, was shapedby theold institutionalists. Theyleft behind a legacyofproblems, more problems perhaps than solutions. Thegenerative aspectoftheoldinstitutionalism, itsopenness tothemacrosociologicalbackground structure behind firms, household consumption, andmarkets, gavemethings to work on. This madeBerkeley theplace to go forgraduate school,becauseTVAand theGrass Roots(Selznick1949) was aboutone way to institutionalize elecand fertilizer tricity production, as well as publicversus private landtenure; Union Democracy (Lipsetetal 1956)wasabout a form ofappropriation ofskill Work and Authority monopolies; inIndustry (Bendix1956) aboutone wayto developinstitutions of small-firm manufacturing oftextiles. Selznick, Lipset, andBendixwere, whatever else they also were, institutional economists. I learned Institutions, then, shapedthecreation and functions of unitsin market and therelations between them. But unliketheinstitutions of moderninstitutionalism, peoplerantheseinstitutions activities on by organizing their behalf. Institutions inthefirst created were, instance, bypurposive people in legislatures and international unions, and in pamphlets of businessideologistsin Northern England. Moderninstitutionalism, to createa caricature, is Durkheimian in thesensethat themcollective manufacture representations selves by opaque processes, are implemented are exterior by diffusion, and without exterior constraining ortheconstraining. peopledoingthecreation The purpose ofthisessaythen is totakesomeselected problems ofmodern economic and some sociology, theoretical generative principles oftheoldinstiis lifeintheoldbonesyet.In thebackground andtoshowthere of tutionalism, theessayis a contrast theoldinstitutionalism inwhich between and peoplebuilt raninstitutions, andthenewDurkheimian institutionalism in which collective on their is generative rather representations operate own.My primary purpose I than the draw of new But so picture the institutionalism is contentious. critical, I hopethat is a stylized caricature version ofthecentral the newness thrust of andparticularly ofthenewinstitutionalism, ofthenewness ofitsfaults. Thisis then a review ofnewinstitutionalist economic bycontrast sociology. Itsmainpurpose somecentral is torevive mechanisms from theold institutiontothrow on thebroadcontours ofour revivification alism,andtouse that light present difficulties. In thefirst I treat oftheanalysis, John who part particularly Henry Wigmore, the studied between theinstitutions ofevidence lawandthefunctioning relation of American It is a peculiarity of such and British courts as organizations. is absolutely courts that and so legitimacy they produce legitimate decisions, to their central andthat in order to produce decisions survival, legitimate they

OLD INSTITUTIONALISM

such haveto use legitimate means, especially legitimate evidence.Producing that involve legitimate evidence is theproduct ofadversary court organizations theoutside from judges,contending counsel, juries, anda flow ofevidence from of witnesses anddocuments, actions with legalconsequences suchas delivery arrests on probable haveto signed documents, cause,andthelike,all ofwhich andlegitimated be organized (or delegitimated) bythecourt. is theintended of theseinstitutions, operating Because legitimacy product thewholeenterprise is central court toinstitutional thethrough organizations, ofcourts, as analyzed hastodo with ory.Muchofthelegitimacy byWigmore, effective meansto achieve of thesubstance justiceby intelligent processing ofevidence.Compared to Wigmore's, modern institutionalism has an impovof legitimacy of rituals on erished notion and of howthelegitimacy depends ofvalue.1 substantive toquestions good senseapplied aspect Thesecondandthird parts ofthis chapter treat themoral commitment as central oforgafor transactions tothepossibility oftheexistence ofcontracts The central treated areRH Coase, nizations in themarket. old institutionalists his "The the Firm" R Nature of John Commons, especially especially (1937), hisLegal Foundations esofCapitalism (1974 [1924]),Joseph A Schumpeter, peciallyhis BusinessCycles(Schumpeter 1964 [1939], pp. 46-83, 105-50; in 1942),andPhilip also see a more version oftheargument Selznick, popular here inhisLeadership inAdministration especially (1957). Thebasicintuition is Durkheim's observation that there is a noncontractual basisofcontract. of kind In particular, thesetofcontracts that constitute a firm hasa particular with andperception by Commons. noncontractual basis,outlined great depth is bestoutlined firms The function contracts that create ofthat specialbasisfor setswithin as activity onthenature offirm boundaries byCoase's classicpaper
of thecases and to reformulate thehistory He tried was a lawyers' law historian. 'Wigmore deciding evidence itwouldmakesensetojudgesandlawyers so that statutes ofthelawofevidence counsel) purpose was toinfluence courts (including contending Thatis,hisinstitutional questions. to therefore tended justice,on average.Wigmore questions so as to achieve to decideevidence did not cases that there and to ignore was originally thanprobably makemoresenseof history the toreflect accurately trying ofview.He also was notan ethnographer hispoint makesensefrom rather his purpose was to be authoritative law in practice; informal aspectsoftheuse ofevidence them. as a wayto improve andin scholarship ininstitutions Wigmore believed than ethnographic. hereofshowing from mypurpose buthis purpose is different he succeeded, My ownviewis that know BecauseI do not as institutions servingjustice. worked hewasright about howthecourts that within hisanalysis from to criticize as wellas he did,I am notin a position thecases and history in think mainly Sociologists of thelaw of evidence material). 1990 has somerelevant (Twining for crimes against persons. with constitutional cases on criminal capital law,especially connection contract is law oneconomic claimsderiving from most law practice was wellawarethat Wigmore thanwith the ithas moreto do with thecontract clausein theConstitution andthat and property an he is analyzing here, is against So formypurposes property. and mostcrime Bill of Rights, on evidence court questions. procedure relevant institution, economically

STINCHCOMBE

whichother elements of thefirm havea competitive advantage overoutside firms thesame services providing or goods in themarket, because of lesser "transaction costs."Schumpeter is the classicsource onthe relation tothe larger structure ofcapitalism competitive ofthat monopoly advantage that comesfrom a firm's having superior productivity. Allthree writers areinterested intheform ofinstitutions that thecompetitive makes structure ofcapitalism possible, given whatthat structure thecompetition is, namely of firms can do something that than else. better anyone The impoverished viewof modern institutional theorists (especially in the reduces theconception ''organizational ecology ofcompetition tothat branch") oftherelations that havethe"legitimate" among organizations2 organizational form forthat "population." Thisconception leavesoutmany aspectsofwhat thetraditional institutional theorists actually thought aboutcompetition. The transaction costsliterature (e.g. Williamson 1975) preserves moreofthisconitdoes notstudy that ofthemarket tent, except legitimacy itself, andso ithas of whatfirms a vacuousdescription are contrasted to. The (as hierarchies) of Commons and Schumpeter conceptions of howcompetitive markets came to be legitimate arenotvacuous. The secondpart ofthis chapter concentrates on howcontracts inthemarket cometobe legitimate areconstituted, mutual ofthe bythe belief waythey bythe that each is committed inthe tothelineofaction contracting parties promised thecommitment ofa firm tobe competent contracts. We emphasize especially in thefuture outtheactivities in thecontracts. are to carry Contracts specified is central what markets consist tothelegitimacy centrally of,so their legitimacy of markets-a factwell known to institutional in thepast. Coase economists whatitis aboutthefirm then that is thenoncontractual basis ofconanalyzes itsspecialcompetencies. theseas they are Commons tracts, namely analyzes embedded whileSchumpeter them as innovations in working treats that rules, havespecific kindsof effects on thecapitalmarket on business and therefore theprocesses to competencies commitment cycles. Selznicktreats by which arebuilt intoorganizations. The third theproblem in thelaw of market section treats ofthelegitimacy its as a system, and relation to thelegitimacy ofbeingable to do competition better than as a moral claim on theprofits ofsuch andlegal things competitors competence. The fourth section is an analysis ofthefailure ofinofa classicformulation inhisTheMoralBasis ofa Backward stitutions byEdward Banfield, especially is that andcombasicargument Society (1967 [1958]). Banfield's institutions, to thecreation ofpublicgoods. In turn, are essential mitment to institutions,
each firm as one,in most 2Thefirms areassumed to be identical, counting applications.

OLD INSTITUTIONALISM

economic progress involved theproduction ofpublic goods,including obvious onessuchas roadsorcivilorder, andnot so obvious onessuchas thewillingness what we should ina spirit todiscuss do next ofhonesty andcompromise. When theinstitutional meansto create publicgoodsarenotavailable, welfare seems to people to dependon looking outforthemselves and their immediate kin, than ontrying tocreate rather greater welfare for all.Banfield applied this analysisto Southern Italy. Diego Gambetta (1993) hasa compatible analysis about whytheMafiaas a business supplying guarantees for contracts in a distrustful does notconstitute environment a goodbasisfor economic development. I applythisline of argument to explainwhycapitalism in Russia is not as successful as it has been in theWest-perhapsnotevenas successful as socialismwas-because thesocialist institutions that enablepeopleto create publicgoodshavebeendestroyed but not replaced byinstitutions appropriate to I argue In particular, capitalism. that, under socialism, contracts between firms andthecorporatist incentral industrial authorities planning agencies wereused of therequisite to create many publicgoods. The destruction of thecapacity of thoseauthorities to reward firms forpublic-oriented behavior has leftthe ofcontracts toMafia-like enforcement as inSouthern when organizations, Italy Banfield was there. that werealwaysthere Olderinstitutionalists didnotassume institutions and in theeffectiveness thecauses of variation of alwaysworked.Consequently werepartof Banfield's The creation of public institutions research program. in a warofeach against all. Institutions can goodsis particularly problematic that of thefree rider (butneednot)reducetheimpediments problem, people can benefit from totheir The level publicgoodswithout contributing creation. ofsuccessincreating ingoodfaith orlaw andorder, orbargaining areall roads, indicators ofinstitutional sensitive effectiveness. The "amoral familism" that Banfield found Italian has itsanalogin the"amoral amongSouthern villagers firmism" ofpostsocialist andinthe a gooddeallikethesouthern Russia, mafias, ItalianMafia, that enforce contracts. These are four rather different The first a clearcase in arguments. studies in courtrooms howwell they whichlegitimacy ofrituals varieswith substanachieve tively justiceintheuse ofevidence inthelawandso produce legitimate is that therulesofevidence areguided decisions. unless My argument byconofjustice, siderations do notproduce The secondstudies they legitimacy. why firms arewilling into contracts that thecounterparty tomaintain toenter require intothefuture thecompetence contracted for. The argument todo theservices arecommitted inseveral willthat is that onlyiffirms ways, including morally, to maintain be believed.The third outlines promise competence whyit ever for to do damageto each other, andhowcivil becomeslegitimate competitors so that that conflict law has had to be arranged competitive givesrisenotto

STINCHCOMBE

Schumpeter makes to "legitimate" competition. claimsin court, butinstead oninnovators, firms that development depends strong arguments that economic firms abletodo damage to butarenevertheless legitimately do notimitate other both argue that this legitinterests. Andhe andCommons entrenched business onlya fewkinds of ofcompetition has always beenprecarious, andthat imacy institute it.Finally we study institutions that someinstitutions cansuccessfully all reigns. times do notwork, andHobbes'soutcome ofthewarofeachagainst to create publicgoods,the that wheninstitutions do notwork Banfield argues flow from successful creincentives tomorality andcooperation that otherwise development) failto ationofpublicgoods(e.g. higher income from economic with thekindof consent evena they elicit, create operate.Thenonlymafias, basisofcontract that socialorder, a noncontractual gametheoretical primitive well civil as business ethics does notwork as andeffective law. The overallargument of thesefoursubarguments is thattheblankplaces come especially from lack of detailed in writings of modern institutionalism institutions work.Muchofthenarand research abouthowparticular theory in organizational is explained theory by rownessin modern institutionalism of institutions. is easlack of detailin theconceptions A narrow conception is due to ignoring theworkof people who ier to mathematize. This in turn into and who to institutions constrain peopleand organizations putthedetail toinstitution's Butiftheguts ofthecausalprocess ofinstiexteriority. conform influence areleft outofthemodel, then we successfully mathematize tutional ofreallife. Wigan empiricism thecomplexity without abstract empiricism, in how, andBanfield knewa lotaboutvariance Schumpeter, more, Commons, itbehooves us to imitate them. work; andhowwell,institutions

vs. Institutionalized Values Ritual Means ofSurvival

in tobehave as specified ofUnited States courts exactly appellate It is theduty of and of to take as their decision institutional writing namely principle theory, Court.These theinstitutionalized standards specified bytheSupreme opinions in thelegitimate decisions areembedded institutionalized standards and other law and statute as thosethat other courts, including at common law,defined as valid. Thus according to the new the Supreme Court,wouldrecognize inMeyer & Rowan(1977),thecourt announced orgainstitutionalist principles ofwitnesses andflows with nizations their contending counsel, judges, juries, to legitimate what of evidence law as a ritual in theformalities are engaging thisactivity, there behind wereno deeperprinciples are doing. If there they decidedtheway aboutwhythey writing opinions wouldbe no sensein their to appeal,and so no of thecontending parties they did, no reasonforeither to say for them at all; itwouldbe sufficient courts reasonto payforappellate theplaintiff favor theSupreme Court wouldprobably that (or thedefense).

OLD INSTITUTIONALISM

we set that that justicewill be served Thus it is onlybecausewe imagine will whateach other of appeals-of judges guessing up thewholeapparatus Meyer that formal procedures they obeythelegitimizing that say-to demand In short, (1983 [1940]) describes. on Evidence and Wigmore & Rowanspecify woulddestroy was a ritual court of theidea that theappellate theacceptance are courts opinions of appellate thewritten itslegitimacy. And it is clearthat whichcould as well have that it is notjust a ritual, to theallegation central thecourt of original to specify withby allowing jurisdiction been dispensed theConstitution and to makeitsownguessabout under whatwas legitimate merely sendback andtheSupreme Court couldin itsturn theSupreme Court; concurring opinions. or and minority and majority a yes no,without inscientific theformal ofcitation ofscientists other rituals papers, Similarly show the author is to to a body of the author that oriented contributing than for theresults ritual reason there is noobvious byothers; recognized knowledge Wecouldenormously the simplify that makes that contribution. section actually onthe comment ifwedidnot havetohavereferee formal organization ofjournals inan Thereis thesametrouble inexplaining theactualalgebra section. results orTexasstate textbook certification California bythe textbook adopted algebra on the theactualfertilizer that backedup thecooptedfarmers organizations, only boards (Selznick1949),theactual"cleaving Tennessee ValleyAuthority ofthewedding vows,the that is theputative consequence unto" organizational that backup theannual ofa corporation. report actualdollars that is whyitis so essential to organizations Whatwe havetoexplain, then, as soon andwhy loselegitimacy rituals notseemtobe a shuck, they their formal in theletter of thelaw,thewordsin the are onlyinterested as it appearsthey number ofpagesin thealgebra theright vows,theplaces on theTVA boards, whenmyson in thepreschool books. Whydid I, forexample, getindignant theNorthern that itis hotter insummer becausethen thecorrect answer learned theeducational impressed is closerto thesun,and he favorably Hemisphere withthe I was dissatisfied it right"'? by "getting butnothis father authority notbecauseitwas wrong, was substantively bookbecauseitsanswer preschool notofficially authorized. is serious formal criteria of whether an appellate opinion We do find ritual matan opinion comesfrom what for court example, substance; organizational take courts intermediate status.But whyis it that appellate tersforitsritual as to with ritual marks so saying opposed those seriously, opinions producing itat that? decideyes (or no) andleaving Court might they guesstheSupreme all the citations had if an we court would be opinion appellate dismayed Why a crucial than ifitmissed thepoint-more citing ofcases butmissed dismayed theprinciple ofjusticeoveragain?Whywouldwe be case andso hadtoinvent Euclidean before ifa schooltaught geometry, analytic geometry lessdismayed

STINCHCOMBE

geometrical learned to treat never ifstudents order, than thecanonical outside with algebra'? problems someconvicwithout for legitimacy, is formality never enough In short, why Whyis it, of the substance? a form more abstract the formality is just tionthat shall is "(d) The court a principle oflegitimacy ofa contract that for example, a final expression parties as intended by the writing was whether the determine [California therein" as areincluded tosuchterms with respect agreement oftheir (1983 Wigmore as quoted in in 1978), of amended Procedure (as Code Civil determion a substantive rule here relies institutional [1940]) p. 75n]? The reading of the rather than just a formal aboutthewillsof theparties, nation of the writing. content peopleaccept towhich thedegree underestimated I believe we haverecently answer, because havetheright think theinstitutions becausethey institutions (1949) a valuethat thepeoplealso accept.WhenSelznick embody institutions of "grassroots" administration in theTVA a majorconsequence showedthat ofTVA intothedefarmer opponents potential of leading was thecooptation in theValley, we all thought thismade generation ofgovernment power fense was notgood Formal democracy suspect. more TVA'sclaimto be democratic itwouldbe good enough forother that forus. Whywouldwe expect enough TVA want the We,too,didnot ofpublic administration orfor citizens? students as a value, thedemocratic becausewe holddemocracy motions, to go through from itsbeinga value. follows capacity Itslegitimating notas a legitimator. thisby looking at whichsocial movements succeed We could investigate Bentham unForexample, Jeremy institutionalized practices. formally against of therulesof evidencein his timeunto arguethattheformality dertook 1990, (Twining andgood sensein legalinference dermined theuse ofreason andothers is that reason ofSelznick theory pp. 38-41). The old institutionalist a meansto reasonand good sense. and good senseare values,and formality Bentham's success.The viewthat justicematwouldpredict Selznick'stheory that thelaw of evidence wouldpredict tersto thelegitimacy of theformality inthediscretion ofthe faith after wouldcometoputa gooddealmore Bentharn law. in evidence in of the a deal less faith versions formal precedent judge, good law ofevitextbooks on thecodified is whatthemodern statutory Andthat would thenewinstitutionalism In part dencesay(Rothstein 1981,pp. 10--12). are who that Beutham should have lost lawyers among out, particularly predict will courts decide. that run the the other on what lawyers dependent predicting make thearguments of lawdepends that they on isomorphism, The profession that willaccept. It seemsrather thecourts will be thesame as thearguments not be and and for to reason instead use sense, good wanted judges lawyers whenandon what rulesexcept thosethat specified boundbyinstitutionalized Thatis,inthe touse his/her the goodjudgment. judgecouldintervene grounds

OLD INSTITUTIONALISM

longpull,lawyers favored rulesthat usedthereason andgoodsenseofjudges, rather than formal rituals ofcorrectness. Forexample, oneobserves inthelawofevidence that thecriteria ofevidence when a hearing areapplied much more strictly dealswith substantive rights than with theformalities ofthecourseofan issuethrough thecourt system, so that hearings on a changeof venuehavevery informal rulesofevidence.Further, thelaw is morepainstaking whentherights at stakeare moreserious, as in criminal cases compared to civilcases (e.g. exclusions ofevidence becauseit was illegally obtained aremuch morecommon in criminal cases), in criminal trials as opposedto grand juryindictment hearings (e.g. thegrand juryrather thanthedefendant decideswhat evidence thedefendant can offer), in habeus than bail bondhearings, corpushearings in cases ofchildcustody rather than rather childsupport levels,in searchand seizureof evidence thandiscovery on Evidence(1983 [1940]) vol. lA, pp. 25-332 gives a hearings [Wigmore The in thelaw ofevidence summary ofvariations according tojurisdictions].3 inshort, thegreater theformality ofthe more justicematters, oftheapplication law ofevidence. Thispoint is crucial toourdifferences with thenewinstitutionalism. Wewant topredict when willdemand theorgatheinstitution more formality, notwhen willmoreenthusiastically as Meyer nization adopttheinstitution's standards, & Rowan(1977) do. Itis precisely becausethebehavior authorofinstitutional that itis important that itiesin enforcing standards varies to notice institutions arestaffed, rather than beingmerely collective representations. arecounted much morecarefully, Similarly, votesin academic departments ballotandkeptconfidential and thevotesaremorelikely to be by secret (the ofthevoter), doctrine onegetshonest beingthat opinions onlywith immunity academic whentheissue is a crucialmatter suchas a tenure case. Another are sentritually disexample:Graduate students outof theroomwhentheir where sertation defense is beingdebated and votedon, butnotin a seminar their is tobe debated. Thecriteria andprocedure for contribution todiscussion examinations areoften in thesyllabus and in facand their grading discussed hisoffice whereas when theprofessor willactually for ulty handbooks, appear as opposedtowhat is announced, is more discussed hours, informally byangry outside his or herdoor. In short, of academic students themorea judgment
on welfare hearings (e.g. hearings rights are dealtwithin administrative 3Whensubstantive laws of evidenceapply. Herewe wouldpredict moreinformal rights) or by agreedarbitration, compared to therulesofevidence right, themoreformal thesubstantive that themoreimportant Similarly proceedings. Jerome Skolnick argues hearings orarbitration (1975 other administrative of thedictates thebigger thecase,themore careful [1966],pp. 155-161)that policeareto follow make ofevidence (e.g. policemen determinants ofthequality as wellas other thelaw ofevidence more willbe evaluated strictly. becausethey know evidence than drug dealers), better witnesses

10

STINCHCOMBE

we find itto be. It is andinstitutionalized themoreformalized merit matters, no one that management, ofimpression that this is all a matter hard to imagine have bywhat they areevaluated andjunior faculty students really careswhether But in particular, procedures. correct rather thanby formally accomplished, valuesthe with institutional more conformity authorities demand institutional is. the decision more important rituals ofinstitutional variations inthebindingness then is that My argument for. The more imporinstitution is about what the bybeliefs aretobe explained that arecarefully willbe those rituals important themore tant theissuesatstake, on questioning as serving thevalue. As a criminal case passes from justified of ofbindingness thedegree to conviction, thestreet, to arrest, to indictment, consequences increases. As thecareer legitimate therulesthat makeevidence increase in importance, thegreater theformality of of an academic judgment rather is tobejudged, themore committee than ofwhat likely thespecification thelarger thenumber of stages, and themoretherights individual judgment, thedegree of of a contract proceeds, so increases of appeal. As a negotiation what has been whether the ofjudgment about agreement agreed to, formality theprocess theterms havebeenmadecleareither during is final, and whether in a trade. orbyreference to thepractice ofnegotiation with importance increase thesubstantive and ritualization, then, Formality institutionalized thereasonforhaving things of theissue,becausein general whenthe is that matter. Or to putittheother wayaround, andritualized they as ofhighpriority, itis an institution ranks something informing valuesystem with oftheinstitution will formalize conformity that thekeepers morelikely and enactthevalueof enforce, theinstitution in a ritual designed to monitor, and ritual. The higher thepriority, thehigher theformality thatsomething. a ritual, is in an institution, theless it is merely a thing The moreritualized of to ourexample itis. Or to return becausethemoresubstantively important themoreformal on a bitofevidence, evidence law,themore justicedepends evidence. is abouttheintroduction ofthat evidence law there

Transaction CostsvsMoral Commitment

aboutfuture a market are ordinarily that constitute agreements The contracts makesthenoncontractual factthat partof contracts It is that performances. on behavior future ofeachother's depend sincetheparties' predictions central, one routinely Butin particular, future abouteach other's morality. predictions can do something better whenthat firm firm's services contracts foranother ofmorality thesort itis inparticular one can do itoneself. than Consequently, to the thatis central firm's theother future competence thatwill guarantee tobe more is notgoing theother firm markets. Ifinthefuture ofmost creation it? with than at their business youare,whymakea contract competent

OLD INSTITUTIONALISM

11

To relatetheold institutionalism to theinstitutionalism of transaction cost itis bestto start with old transaction analysis, costanalysis, in Coase (1937). Coase defined themaximizing as thedivision boundary ofa firm between the itcoulddo better orcheaper itcouldhire setofthings than orbuy.An airplane can makeplanesbetter and manufacturer thanan airline developer can. But it can onlyborrow themoney to developa passenger plane if airlines sign in advanceto buy(Newhouse1982). Airlines contracts willbuythem forthe ifthey believe future manufacturers willseriously andcompetently only usethe andmakea better money todevelop Airlines willmakecommitments airplane. in their turn believethey themselves will stillbe able to onlyif theairlines in and compete selling services. traveling express shipping In particular, airlines will haveto sell airline services better thanBoeing, ifthemanufacturers Lockheed, orMcDonnell-Douglas, for werebetter atruntheairlines ningairlinesas well as at building airplanes, wouldmerely be their financing Bankers believe thefutures competition. only contracts between airlines andairframe ifthey think manufacturers themanufacturer can andwill builda better and theairlines will stillbe there airplane, to buyit whenthe contract comesdue. It is an immediate derivation that ofCoase's theory part, element of contract at least,of thenoncontractual has to be mutual beliefin each other's future Muchof one's transaction costhas superior competence. to do with to guarantee meansthefuture of trying bycontractual competence therent thecounterparties, ofone's ownsuperior without overto them giving in one's ownbusiness. future The nature ofmutual competence ofthissystem belief ineachother's clearwhen a great becomes deal competence particularly nowand in thefuture, has to pass between of money, three kindsof different eachrelying on thesuccessoftherelation firms, between theother two. The expected return ofall thetransaction costsofthese manudevelopment, andloancontracts facturing, onthefaith ultimately depends ofall three parties that themanufacturer willshowdevotion tobuilding andsafer better, cheaper, Unless there is competence airplanes. and will behindthattransaction-cost unlessBoeing or Lockheedor McDonnell-Douglas can reallydo boundary, somethings than better thewhole they (oranyone else) canbuyon themarket, web of contracts comescrashing down. Likewiseunlesstheairlines behind their firm's can do their willbe no money equilibrium to boundary job, there no money forthemanufacturer pay forthebetter to paythe plane,so in turn The same,changing thechangeable banker. holdsfor thebanker parts, pricing thecapital risks for andusing tobackother responsibly market, banking equity that for contracts ofthecapital market. split up therisks appropriate parts Transaction costsareworth there aretwo(orinthis paying, then, onlywhen firms ittakesto be best case at leastthree) to be anddo what believably trying can be believed willanyother at their ownbusiness. firm Onlyifa firm prefer

12

STINCHCOMBE

and thetwofirms between theboundary activities, thuscreating itto internal ofa contract. thenecessity tasks, and wasteremoval a university contracts outitsjanitoring Similarly, combecauseithas a believable andteaching in-house, butkeepsitsresearch It commitment to cleanbuildings. and no noticeable mitment to scholarship, ultimately makes andteaching that to research commitment is theuniversity's for theunifirm believeitwillbe paidforitscontract, thewastemanagement believe andgrant-givers costswillbe paid onlyifstudents versity's overhead buysa CATSCAN thehospital theuniversity can andwilldo itsjob. Similarly derived from theincomeor credit with thanbuildone itself, machine rather he mayhavehad a stroke.If theclient its credibility to a clientwho thinks to buya CATSCAN that does notknowenough hospital, choosesthewrong notgeta secondchoice.AndtheCATSCAN manufacturer machine, he might the patients willnotbe paidfor attract stroke that cannot that sellsto a hospital machine. protected lies outside themarket, 1975) that (Williamson The "hierarchy" has to be a thing that reliably on into produces costsbarriers, by transaction paying transaction competence justifies future thefuture, itspredicted so that cost(a costof risk)of goingintotheemergency costsnow. The transaction willonly be paidifone a stroke having when one is perhaps roomofa hospital and care to be to stay competent, competent thinks themedical workers enough if to seventh necessary, their birthday party daughter's to workeventhrough machine before of to a CATSCAN on the buy urgency, mainly degree triage andso on. one hasevenhadthestroke, their distinctive to which create the compeOf course, degree organizations of what the exact definition is a variable. And tencies moral commitments by commitvariable is mean that managerial we would difficult-presumably by of woodanddrawers than thecommitment ofhewers ment is moreimportant more that variable define I that we will But of water, forexample. imagine in AdminisSelznick's indicators it from of Leadership exactly by extracting OliverWilliamson them from (1975),because tration byabstracting (1957) than of a theory ofthe"distinctive competence" Selznickwas primarily developing could. itsability torealize valuesina waynoother organization anorganization,

Destruction Birth and Death vsInstitutions ofCreative

that facilitated thatmanyeconomic institutions capitalthought Schumpeter and than Imperialism on valuesother capitalism. ismas we knowitdepended weredriven mercantilism by thevalue of poweras muchas by profit.Lathanby be achieved moreeasilyby socialism could probably bor discipline classes. Valuesof democracy nowshorn of itsfeudal a capitalism governing on competing in their turn associatedwithcapitalism depended empirically

OLD INSTITUTIONALISM

13

political eliteswhowanted to govern first, profit from government afterwards. fits Schumpeter perhaps uncomfortably with Selznick as a comember ofan old institutional school.Butone ofthepositions he holdsin common with theold institutionalists is that theform ofcompetition amongorganizations is historicallyvariable, depending a good deal on thevaluesofthegoverning classes andtheir challengers. InSchumpeter's the argument ruling institutions affected organizational ecolhe called"creative andinparticular what ogy, destruction" (Schumpeter (1964 [1939]),1942). In thelongrun, thebigcompetitors ofan earlier population of arenew;later, organizations populations oforganizations ofa different sort that earlier reshape thenicheson which organizational populations depend.If itis ofearth true theoxygen was created that atmosphere bythefirst chlorophyllshift to oxygen-breathing usinganaerobic populations, causingthelong-run mostanaerobic animalsand "creatively thenbiological destroying" strains, has powerful evolution analogiesto Schumpeter's reasoning.Thus to analyze thewithin-species or within-"organizational population" competition is andofeconomic to missthebig story ofevolution development: interspecies competition. ThusSchumpeter wasprimarily intheinstitutions interested that allowed the ofwholepopulations peaceful4 destruction oforganizations. To putitanother hewanted suchprecarious toknow howmodern created way, society legitimacy orcommunity-sustaining for a given oforganization that the type jobs, profits, of wholeindustries else builta contributions couldbe destroyed. If someone forthefirst all theaccumulated thataccounted better mousetrap, legitimacy ofcatbreeders curve partoftheclimboftheold population up theGompertz thisprecariousness of the was notapparently enough.Schumpeter regarded ofold populations oforganizations as remarkable, legitimacy andhe therefore as theinstitutions that allowedsuchdestruction ofpeople'slivelihood regarded He argued that destruction that causeddepresitwas suchcreative precarious. scientist toknow sions(Schumpeter 1964[1939]),andhe waspolitical enough wereconfronted withchallenges to their and theeconomy that governments whenthey allowedsuchdestruction and itsaccompanying legitimacy deprestheremarkable between sions.He thought institutions facilitating competition wereextraordinarily speciesoforganizations precarious. R ofwhattheseinstitutions wereis John But I think thedefinitive analysis ofthelegalprotechiscareful definition Commons's (1974 [1924]),especially his analysis ofwhat starts tionof competition (1974,pp. 83-134). Commons thelegaldefense means for legitimate competition capitalism bydistinguishing
andinstituorganizations knewthat destruction-he peaceful preferred 4AtleastSchumpeter thatwas bad foreconomic buthe thought by conquest, and destroyed created tionswereoften As does Gambetta (1993). development.

14

STINCHCOMBE

incompetition5 rules" offirms toa given corpothat aredistinctive of"working theBoardofDirectors legally inthesensethat only ration. Thesearedefended can allocatetheproperty orpermit access ofthecorporation of a corporation andevenstockholders orfour days cannot takeawaya lathe on theshopfloor, Interference with working their property interest. ofa firm electrician tosatisfy corporation, the defended autonomy ofa competitive rulesinvades thelegally rulesthat innovative allowthem todo something autonomy tohavedistinctive When can routinely advantage ina nichein a market. that givea monopolistic in themarket (Commons1974 [1924], thisis combined withan opportunity proa "goingconcern value,"and theinstitutional pp. 153-157),it produces ofeconomic distinctive to capitalism is theprotection of tection opportunities value(Commons that 1974:172-213). goingconcern whencombined with to Schumpeter) managed WhatCommons (especially ecologyof of organizational do, then, was tojump overtheinstitutionalism for andtheorized one population firms, especially byAdamSmith (developed & Freeman totheestablishdirectly 1977,1989recently) differently byHannan ment species(defined bytheir ecology ofmultiple competing ofanevolutionary rulesandbytheopportunities-or Commons niches-thoseexploit). working inthelegalinstitutions andthought these weredefended was an institutionalist of capitalism.Whenhookedtogether they explainalso whyTobin'sq-ratio valueoftheir assetsis of themarket valueofcorporations to thereplacement than1 in economic 1977), why booms(Tobin& Brainard ordinarily greater arebusiness inwhich there ratio bethat goesdowninpopulations depressions andwhyboth bustaredefended boomand,moresurprisingly, ingeliminated, on a Thereis no place for institutions to abolishorganizations byinstitutions. them. ecology-they onlylegitimate largescale inmodern organizational either Darwinian evolution doesnotneedinstitutions defending competition from within orbetween defend themselves socially competispecies.Humans in restraint oftrade, racialprejudice, guild tionbytariff conspiracies barriers, topractice, trade professional societies andlicenses regulations, patent offices, andnaturalization protection rackets, immigration unions, zoning regulations, andthegenocide ofindigenous ofcompetitors, peoples. services, conquest It is a In humanhistory, has notordinarily been legitimate. competition Mostinstithis. modern havenotnoticed wonder that ecologists organizational allowpeople'slivelirestrict Institutions that competition. tutional conditions and are rare.Schumpeter by competition hoods and capitalto be destroyed toother thelegitimacy of"exposure" knew that andconsidered Commons peoits to be explained. themainthing particularly Capitalism, ple's "liberties" butis is notat all natural andcreative destruction part, legitimate competition
1982. in Nelson& Winter thesameconcept in"routines" 5See also essentially

OLD INSTITUTIONALISM

15

only theupswing toexplain creation. To use legitimacy instead an institutional of intensified that thelegitimacy growth rates, andto forget of organizational populathat destroys largelegitimate withinnovations competition by firms and in thedaysof Commons blindness tions,wouldhaveseemeda peculiar and immigration quotaswerein the tariffs Schumpeter, whenSmoot-Hawley in Mexico overtheborder legitimacy of maquiladoras land. The precarious is stillnotvery legitimate. competition itself might teachus againthat

Does NotMean ThatSocialist Institutions Do NotWork OnesDo Capitalist

they have havedecidedthat countries thepopulations In many East European old communist are voting their tried so they capitalism and it does notwork, to work thefailure of capitalism leadersbackin. In theold institutionalism, in TheMoralBasis of in southern byEdwardBanfield, Italywas also argued bookwas that some a Backward Society (1967 [1958]). The basicidea ofthat andthat they do so by organizations, sorts ofinstitutions undermine capitalist intheachievement toprovide ofpublic goods(law andorderintegrity failing offices civillaw,city roads, oreconomic development organization, especially firm and factory foundation). facilitating ifthenuclear its Banfield's basic notion was that family was so setup that andinterests overrode those ofother then those institutions, invariably solidarity on generosity other institutions couldnotdo their that depend job. Institutions Partof and attention to collective welfare are especially vulnerable. of spirit andleadership thefulfillment ofoccupational institutions' job was legitimating in firms operations. significant government and in economically obligations inthepursuit ofpublic integrity then inarenas requiring Large-scale corruption families.The of a particular way of institutionalizing goods is an outcome are becausethey arein a certain sensenotinstitutions MafiaandCosa Nostra in thebusiness ofcorrupting whatever institutions getin thewayofshort-run see especially maximization interests (on theSicilianMafia, ofnuclear family Gambetta 1993). if we consider therole of accreditation The basic pointcan be illustrated ineducation, thefield where & Rowan(1977,pp.354-356, associations Meyer Accredroleofinstitutions. their observed thepowerful 1975paper)first citing formal nor resources to have distribute; powers, itation societies do not many is that haveonlymoral they very genpowers.One oftheconsequences they to go inspect for from several educational ask volunteers organizations erally as a SouthItalianor Siciliansocial organization another one. Now imagine them holdto andmaking volunteers outunpaid described sending byBanfield butwithout wants to explain, ofthesort standards making educational Meyer make the the would off accreditors can't refuse. an offer surely Paying they

16

STINCHCOMBE

formal report intoevenmorecantand ritual than Meyerobserves.A phrase from Teamsters' leader Jimmy Hoffa in a trade union debate overpolitical actionoccursto me: "Thereare twokindsof political action. You can make speeches, oryoucan givemoney. We givemoney." Ifschoolsgavemoney for wouldtherituals offormal accreditation, organization be convincing? Theextension ofBanfield's institutional argument tocapitalism canmost easilybe seenbycalling ona really oldfashioned institutionalist, EmileDurkheim (1933 [1893]). Durkheim heldthat thedivision oflaborrested on thenonconofcontract, tractual elements thecommitment tovaluesofcommercial honesty, nonstrategic use ofbankruptcy, advertising with someinformation value,comin one's occupation, andthelike. Banfield's then petence argument might be readas asserting that boththecontracts between firms, and between governarenotinstitutionalized familism." ments andfirms, under "amoral in Eastern Now back to theattempt to introduce capitalism Europe. The language describing Sicilyis often usedtodescribe theeconomic arrangements in capitalist in Russiadoes nothaveto be imported Russia;the"mafia" from was Southern Italy.The legitimation ofinstitutional relations under socialism ingovernment measures bywayofthepurposes ofgovernment, as manifested ofoutcome, ofproduction government subsidies that was considered a public good,andthelike.Thecontract between a firm andthegovernment washardly inthesense deeply theologically grounded, butithadnoncontractual elements that other parts ofthegovernment wouldbackupthecorporatist industry glavk andhelpenforce on thefactory conformity manager. meaThis central forsupply, planning legitimation system quality control, for ofproductivity, laborrelations and payment surement regulation, pricing of finished or semifinished delivery goods,and so on, no longer legitimates. seemsto be Calvinism sanctions forcommercial giving supernatural integrity thin The capacity ofthepopulation on theground. tocreate public goods,such honanditscredit-rating as industry credit extension standards-setting, system, used instock becausethat estbrokerage andbondmarkets, is crippled capacity in thecentral to be all embedded planning system.The lack of intermediate will ownbasedonthe bodieswith oftheir corporate legitimacy expectation they Banfield likethat a condition liveup to their ownmoral then system produces in Russiaorother is notgoodfor calledamoral familism. Andthat capitalism in Southern than EastEuropean itwas goodfor countries, anymore capitalism Italy.

Ring Out theNew,RingIn theOld

well do so bypaying that work hereis that The basic postulate organizations with business their to conduct serve to be to to people values, try competent, and to treat the effect of the incentive It is to integrity. easy exaggerate payment,

OLD INSTITUTIONALISM

17

it as ifit wereonlya game-theoretical token.Butpayment is an institutional tool as well,forwe pay forthings we believein. I wouldarguethat paying forthings we believein is thecoreofwhat an institution is. We accepttokens of credit rather thanmoney incentives in algebraclasses,and pay people to teachthem, becausewe believein algebra; theteacher does notgetto cash in theA's he or she does notgive outas in gametheory, and thestudent does in at thestore.Their notgetto cashthem onlyvalueis that everyone believes there was somerealmathematics that behind them. Evennewinstitutionalists believein algebraand are willing at Stanford to pay forit,and they do not to a schoolthat does notbelievein algebra.Nordo wantto givethat money peoplewant to givemoney to insurance companies that won'tpaywhenthey wantto buyportable from die, nordo they harddiskdrives a company that doesn'tanswer itstechnical helpline,6 nortotrust mostofthecapital markets in Eastern ofresources Europe.The combination andbelievable commitment can onlybe created, so theold institutionalists ifpeoplebelievethat argued, enforcers theinstitutional themselves believethevalues. for that can we explain can Onlywith assumption, example, why capitalism first legitimate the horse-and-buggy industry andthen legitimate the automobile ofcapitalism. industry that destroys it,without changing thebasicinstitutions oftheassumption ofcommercial Andittakes the failure that enforcers contracts knowso believein honest dealingto see whytheRussiansand Ukrainians well that enforcers do notbelieve capitalism does notwork:theinstitutional is possible,so they do notbother to createit. The thatcommercial honesty of transaction costanalysis is that one can go outon themarket, assumption one and(sometimes) than payall thetransaction costs, getbetter performance contract could produceoneself. It is onlythecontrast of thatmarket with thefirm can do better itself thatmakestheboundary around whatthefirm in Coase's sense. But one cannot or hierarchy an equilibrium explainwhy is anythere unlessoneis willing that transaction there there tobelieve partners that thecompetence and responsiveness will deliver thegoods,willmaintain at leastuntil can do itself, work to what thefirm makesthesupplier's superior witha One paysthetransaction costsbycontracting thecontract is fulfilled. theequilibrium to one's own. Otherwise withcompetence supplier superior as in theold USSR. firm size is thewholeeconomy, perhaps is that it does nothave In short, withthenew institutionalism thetrouble somein it. The gutsof institutions is that thegutsof institutions somebody andis often tothestandards carestoholdan organization where really paidto maintaining its is insidetheorganization, Sometimes that do that. somebody
before number 6My adviceis to call thetechnical support buying-Iomegahas a wonderful therunaround. a client in trouble for computerized phonesystem giving

18

STINCHCOMBE

body,sending outvolunteers competence.Sometimes it is in an accrediting in thealgebra is really course.Andsometimes that to see ifthere anyalgebra orhisorher is lacking, inwhich case the center cannot somebody, commitment, hold,andmere anarchy is loosedupontheworld.
ACKNOWLEDGMENTS

madedetailed comments on a previous BrianGranand Stephen draft, Barley toprecious andRichard CarolHeimer writing, Lempert disciplined my tendency madedetailed comments on thenext-to-the-last draft.
VisittheAnnualReviews home page at http://www.annurev.org.

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