JOURNAL OF ECONOMIC ISSUES Vol. XL No. 1 March 2006
What Are Institutions?
Geoffrey M. Hodgson
The use of the term institution has become widespread in the social sciences in recent years, reflecting the growth in institutional economics and the use of the institution concept in several other disciplines, including philosophy, sociology, politics, and geography. The term has a long history of usage in the social sciences, dating back at least to Giambattista Vico in his Scienza Nuova of 1725. However, even today, there is no unanimity in the definition of this concept. Furthermore, endless disputes over the definitions of key terms such as institution and organization have led some writers to give up matters of definition and to propose getting down somehow to practical matters instead. But it is not possible to carry out any empirical or theoretical analysis of how institutions or organizations work without having some adequate conception of what an institution or an organization is. This paper proposes that those that give up are acting in haste; potentially consensual definitions of these terms are possible, once we overcome a few obstacles and difficulties in the way. It is also important to avoid some biases in the study of institutions, where institutions and characteristics of a particular type are overgeneralized to the set of institutions as a whole. This paper outlines some dangers with regard to an excessive relative stress on self-organization and agent-insensitive institutions. This paper draws on insights from several academic disciplines and is organized in six sections. The first three sections are devoted to the definition and understanding of institutions in general terms. The first section explores the meaning of key terms such as institution, convention, and rule. The second discusses some general issues concerning how institutions function and how they interact with individual agents, their habits, The author is a Research Professor in Business Studies at The Business School, University of Hertfordshire, De Havilland Campus, Hatfield, U.K. He is very grateful to Margaret Archer, Ana Celia Castro, Raul Espejo, Ronaldo Fiani, Jane Hardy, Anthony Kasozi, Uskali Mäki, Douglass North, Pavel Pelikan, John Searle, Irene van Staveren, Viktor Vanberg, anonymous referees, and others for comments and discussions. This essay also makes use of some material from Hodgson 2001, 2002, and 2004.
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Geoffrey M. Hodgson
and their beliefs. The third examines the difference between organizations and institutions and what may be meant by the term formal when applied to institutions or rules, by focusing on some of Douglass North’s statements on these themes. The fourth identifies an excessive bias in the discussion of institutions toward those of the self-organizing type, showing theoretically that these are a special case. The fifth argues that institutions also differ with regard to their degree of sensitivity to changes in the personalities of the agents involved. Finally, the sixth concludes the essay. On Institutions, Conventions, and Rules Institutions are the kinds of structures that matter most in the social realm: they make up the stuff of social life. The increasing acknowledgement of the role of institutions in social life involves the recognition that much of human interaction and activity is structured in terms of overt or implicit rules. Without doing much violence to the relevant literature, we may define institutions as systems of established and prevalent social rules that structure social interactions.1 Language, money, law, systems of weights and measures, table manners, and firms (and other organizations) are thus all institutions. Following Robert Sugden (1986), John Searle (1995), and others, we may usefully define a convention as a particular instance of an institutional rule. For example, all countries have traffic rules, but it is a matter of...
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