Institution: the old and the new

(by Anindrya Nastiti)

Having gained its popularity in the last decades, the study of institutions encompasses a wide-range of disciplines: sociology, psychology, anthropology, economics, and politics. Dominating political science in the early 20th centuries, the old institutionalisms focus on formal institutions such as government body and the state. Later, the seminal work of Meyer & Rowan (1977) in organization studies, and latter DiMaggio & Powell (1983), shifted the way institutional analyses are conducted; and gave rise to the New Institutional Economics (NIE) in the following decade.

From the economic point of view, NIE rose to the dissent of the formerly, widely accepted assumptions in neoclassical economics that explain how individuals behave when faced by set of choices: the rational, wealth-maximizing nature of individuals, preference stability, and instant and costless exchanges in perfect information situation (Menard&Shirley 2014). The neo-classical approach also views economic growth to be influenced by three factors in production. According to the founders of NIE, particularly Douglas C. North, technological change is not the pre-eminent source of economic growth (North 1993) and that underdevelopment in the Third World is mostly caused by the difficulty for institutional reforms, which are affected by incomplete information, imperfect mental model, embodied belief, and the path dependence nature; constrained by existing set of incentives (Menard & Shirley 2014). The foundation for definitions and roles of institutions in the economic field that North laid will be highly exploited in explaining urban water institutions phenomena in this study.

Powell’s is one of the early works on institutions. By then, institutions were recognized as “rule of conduct which men make agreement or which is made for them by some authority which they recognize as such… law of conduct devised by men” (Powell, 1899: 475). Institutions as rules are later emphasized by North (1990). He wrote that, “Institutions are the rules of the game in a society nor, more formally, are the humanly devised constraints that shape human interaction… include both what individuals are prohibited from doing and, sometimes, under what conditions some individuals are permitted to undertake certain activities… they therefore are the framework within which human interaction takes place.”

That rules are incentives that structuring human behaviour were addressed in the definitions proposed by scholars in the 1990s. Ostrom (1986) clearly defines rules as ‘prescriptions commonly known and used by a set of participants to order repetitive, interdependent relationships’. Rules can determine which actions are required, prohibited, or allowed. North (1990) considers that institutions can reduce uncertainty in society by establishing a stable structure of human interaction in daily lives. Crawford & Ostrom (1995) define institutions as rule, norm, or strategy that creates incentives for behavior in repetitive situations. Hurwicz (1994) states that, alone or in a set of related arrangements, institutions can adjust behavior in a situation through coordination among players. Polski & Ostrom (1999) later stress that institutions imposing constraints on the range of possible behavior and feasible reforms by structuring information and creating incentives to act or not to act in a particular situation. Hodgson (2006) then, proposing the definition of rules as “..socially transmitted and customary normative injunctions or immanently normative dispositions, that in circumstances X do Y”. He further defines institutions as “Institutions as special type of social structure…systems of established and prevalent social rules that structure social interactions, creating stable expectations of the behavior of other, constrain and enable behavior, can be observed through manifest behavior.” Skoog (2005) however adds that the non-enforced rules are considered non-existent, therefore the influence of institutions on behavior and interaction is determined by the concept of rules-in-use rather than rules-in-form .

Recent scholarly works on institutions further extend the definition of such concept to include behavioral aspect, not merely as rules. As previously mentioned, institutions create stable expectations on behavior. William Riker’s definition on institutions – ‘rules about behavior, especially about making decisions’ (Riker 1982 in Ostrom 1986)- supports this idea. Tuomela (1995; in Hodgson 2006) developed a notion of collective intentionality: individuals belong to a group act in certain manner, believing other members of the groups act the same. Hodgson (2006) argues that defining institutions as behavior will mislead us ‘into presuming that institutions no longer existed if their associated behaviors were interrupted’, but he agrees that institutional characters may cease to exist if not sufficiently exercised through manifested behavior. Greif and Kingston (2001) further add that “…ultimately the behavior and the expected behavior of others rather than prescriptive rules of behavior that induce people to behave (or not to behave) in a particular way… A social situation is ‘institutionalized’ when this structure motivates each individual to follow a regularity of behavior in that social situation and to act in a manner contributing to the perpetuation of that structure”. As Greif and Kinston state that the behavioural regularities based on (often) conflicting motivation of individuals will complicate the analysis, I treat individual behaviour as exogenous to institutions; and therefore focusing on institution-as-rules. Nonetheless, the behaviour of agents will also gain the spotlight to enrich the discussion on this study.

The importance on how behavior shapes institutions is put forward by Grief & Kingston (2001) with their definition on institutions as equilibria. They argue that it is not rules that regulate people to behave or not to behave in certain manner; it is the aggregated behavior and the expected behavior of individuals. The structures shaped by such behavioral regularities motivate individuals to act in a manner that lead to structure perpetuation.

Although the widely accepted single definition of institutions is highly unlikely due to the multidiscipline nature of the subject, the working definition used in this study follows aforementioned scholars as well as on Saleth & Dinar (2004): Institutions are the rules of the game; humanly devised constraints for coordinating human interaction by defining and delimiting the set of choices, therefore structuring information and determining incentive environment and behavioral conditions for the actors.

North (1990) made a clear distinction between institutions and organizations. He defines organizations as the of groups of individuals bound by some common purpose to achieve objectives, and serve as agents of institution changes; therefore put forward rules-players analogy in sport games. This notion is further challenged by Hodgson (2006) where he insists on differentiating the treatment of organization as a player in institutional changes or as special types of institutions. Upon his correspondence with North, it is concluded that organizations can be regarded as players for the purpose of socio-economic system analysis as a whole; meanwhile, in general circumstances, organizations themselves had internal players and systems of rules, and hence organizations are special types of institutions, with ‘additional features’ (Hodgson, 2006). Considering North and Hodgson’ views and since this study focus on the larger picture of urban waterscape institutions, I will perceive organizations, governmental and non-governmental, as players, or agents of institutional changes; ignoring the potential conflicts among internal individuals within organizations.

Saleth & Dinar (2004) had generously summarized the nature of institutions that are important to consider in analysis. First, institutions are subjective constructs. “It means that the impact of institutions on regulating behaviour depends on the extent to which they permeate the thinking and actions of individuals”. Second, institutions are path-dependent: changes in structures are shaped by previous assemblies. Third, institutions are relatively stable and durable due to their path-dependant and self-reinforcing nature, the anchoring role of slowly changing informal rules, and the complexity of formal rules that requires high transaction costs in changing them. Fourth, institutions exist in hierarchy and are nested and embedded to, and complement each other. Understanding the nature of institutions is particularly useful to further explore learn its implications with the institutional changes.


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  • DiMaggio, P.J. & Powell, W.W. (1983) Iron Cage Revisited: Institutional isomorphism and Collective Rationality in Organizational Fields. American Sociological Review, 48(2):147-160.
  • North, D.C. (1993). Institutional Change: A Framework of Analysis, in Institutional Change: Theory and Empirical Findings, Sjostrand, S. (Ed), S.S.E Publishing.
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  • Skoog, G.E. (2005) Supporting the Development of Institutions – Formal and Informal Rules. UTV Working Paper 2005:3. SIDA (Swedish International Development Cooperation Agency.
  • Greif, A., & Kingston, C.(2001). Institutions: Rules or Equlibria? In N. Schofield and G. Caballero (eds.), Political Economy of Institutions, Democracy and Voting, DOI 10.1007/978-3-642-19519-8_2. Springer-Verlag, Berlin Heidelberg: 2011.
  • Saleth, R.M. and Dinar, A. (2004). The Institutional Economics of Water: A Cross-country Analysis of Institutions and Performance. Edward Elgar and World Bank.

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