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On the Virtues of the Old Institutionalism Author(s): Arthur L. Stinchcombe Source: Annual Review of Sociology,y : Annual Reviews Stable URL: http://www.jstor.org/stable/2952541 . Accessed: 02/05/2011 08:37 Your use of the JSTOR archive indicates y our acce p tance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the p ublisher re g ardin g an y further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=annrevs . . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Annual Reviews is collaborating with JSTOR to digitize, preserve and extend access to Annual Review of Sociology. http://www.jstor.org " id="pdf-obj-0-2" src="pdf-obj-0-2.jpg">

On the Virtues of the Old Institutionalism Author(s): Arthur L. Stinchcombe Source: Annual Review of Sociology, Vol. 23 (1997), pp. 1+2-18 Published by: Annual Reviews

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On the Virtues of the Old Institutionalism Author(s): Arthur L. Stinchcombe Source: Annual Review of Sociology,y : Annual Reviews Stable URL: http://www.jstor.org/stable/2952541 . Accessed: 02/05/2011 08:37 Your use of the JSTOR archive indicates y our acce p tance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the p ublisher re g ardin g an y further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=annrevs . . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Annual Reviews is collaborating with JSTOR to digitize, preserve and extend access to Annual Review of Sociology. http://www.jstor.org " id="pdf-obj-0-53" src="pdf-obj-0-53.jpg">

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


ArthurL. Stinchcombe

VisitingFellow, American Bar Foundation,and Part-time Professor, Department of



Evanston, Illinois 60201


formalorganization, competition, performance,



Institutionsare staffedand arecreated to do thejob of regulatingorganizations.

This staffing, and all thecreative work that is involvedin financing,governing,

training,and motivatinginstitutional actions by thatstaff in organizations,has

been lostin recentinstitutional

theorizing. This staffingwas centralto theold

institutionalism, which is whyit looked so different. The argumentis exemplified

by applyingthe insights of classicalinstitutionalists to the legitimacy of court

decisionsas determinedby the law ofevidence, to thelegitimacy of competition

and thedestruction of otherorganizations by competition, to thenoncontractual

basisof contract in commitments

tomaintain competence to do theperformances

requiredin contracts, and to the failure of institutions ofcapitalist competition and


of mafia-like enforcement

ofcontracts in postcommunist


The institutionsof the new institutionalism

do not have enough causal substance

and enoughvariance of characteristics to explain such various phenomena.


  • I was recruitedinto sociology by the institutionaleconomists, 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 beforegraduate school to Karl

Marx, Joseph

Alois Schumpeter,and Max Weber, thenin graduate school to JohnMaurice

Clark, Clark Kerr,John R Commons,and manyhistorians of law (because most

economic institutionseventually make theirway into the courts). I became a


0360-0572/97/0815-0001 $08.00



sociologistin orderto makea livingas an institutional economist, since it was

clearthat I wouldmake a poorliving at thatamong economists.

My firstintellectual identity, then, was shapedby theold institutionalists.

Theyleft behind a legacyof problems, more problems perhaps than solutions.

The generativeaspect of the old institutionalism, itsopenness to the macrosoci-

ologicalbackground structure behind firms, household consumption, and mar-

kets,gave me thingsto workon.

This made Berkeleythe place to go forgraduate school, because TVAand

theGrass Roots(Selznick 1949) was aboutone way to institutionalize elec-

tricityand fertilizerproduction, as well as publicversus private land tenure;

UnionDemocracy (Lipset et al 1956)was abouta formof appropriation ofskill

monopolies;Work and Authorityin Industry(Bendix 1956) aboutone wayto

developinstitutions of small-firmmanufacturing of textiles. Selznick, Lipset,

and Bendixwere, whatever else theyalso were,institutional economists.

Institutions,I learned then, shaped the creation and functionsof unitsin

marketand therelations between them. But unlikethe institutionsof mod-

erninstitutionalism, people ranthese institutions by organizingactivities on

theirbehalf. Institutions were, in the first instance, created by purposive people

in legislaturesand international unions, and in pamphletsof businessideol-

ogistsin NorthernEngland. Moderninstitutionalism, to create a caricature,

is Durkheimianin thesense that collective representations manufacture them-

selves by opaque processes,are implementedby diffusion,are exteriorand

constrainingwithout exterior people doing the creation or the constraining.

The purposeof this essay then is to takesome selected problems of modern

economicsociology, and some theoretical generative principles of the old insti-

tutionalism, and to showthere is lifein the old bonesyet. In thebackground of

theessay is a contrastbetween the old institutionalism inwhich people built and

raninstitutions, and thenew Durkheimian institutionalism in which collective

representations operate on theirown. My primarypurpose is generativerather

thancritical, so thepicture I draw of the new institutionalism is contentious. But

I hopethat caricature is a stylizedversion of thecentral thrust of thenewness

ofthe new institutionalism, and particularly of the newness of its faults.

Thisis thena reviewby contrast of new institutionalist economic sociology.

Itsmain purpose is torevive some central mechanisms from the old institution-

alism,and to use thatrevivification to throw light on thebroad contours of our


In thefirst part of the analysis, I treatparticularly John Henry Wigmore, who

studiedthe relation between the institutions ofevidence law andthe functioning

of Americanand Britishcourts as organizations.It is a peculiarityof such

courtsthat they produce legitimate decisions, and so legitimacyis absolutely

centralto theirsurvival, and that in orderto producelegitimate decisions they



haveto use legitimatemeans, especially legitimate evidence. Producing such

legitimateevidence is theproduct of adversary court organizations that involve

judges,contending counsel, juries, and a flowof evidence from the outside from

witnessesand documents, actions with legal consequences such as deliveryof

signeddocuments, arrests on probablecause, and the like, all ofwhich have to

be organizedand legitimated(or delegitimated) by the court.

Because legitimacyis theintended product of theseinstitutions, operating

throughcourt organizations, the whole enterprise is centralto institutional the-

ory.Much of the legitimacy of courts, as analyzedby Wigmore, has to do with

effectivemeans to achievejustice by intelligentprocessing of thesubstance

of evidence.Compared to Wigmore's,modern institutionalism

has an impov-

erishednotion of legitimacyand of how thelegitimacy of ritualsdepends on

substantivegood senseapplied to questionsof value.1

The secondand third parts of this chapter treat the moral commitment aspect

ofcontracts for transactions as centralto the possibility of the existence of orga-

nizationsin themarket. The centralold institutionalists

treated are RH Coase,

especiallyhis "The Natureof theFirm" (1937), JohnR Commons,especially

hisLegal Foundationsof Capitalism (1974 [1924]),Joseph A Schumpeter, es-

peciallyhis BusinessCycles (Schumpeter 1964 [1939], pp. 46-83, 105-50;

also see a morepopular version of the argument in 1942),and Philip Selznick,

especiallyin hisLeadership in Administration

(1957). The basicintuition here

is Durkheim'sobservation that there is a noncontractual

basis ofcontract.

In particular, the set of contracts that constitute a firm has a particularkind of


basis, outlined with great depth and perceptionby Commons.

The functionof that special basis for contracts that create firms is bestoutlined

byCoase's classicpaper on thenature of firm boundaries as activitysets within

'Wigmorewas a lawyers'law

historian.He triedto reformulatethe history of thecases and

statutesof the law ofevidence so thatit would make sense to judges and lawyers deciding evidence

questions.That is, hisinstitutional purpose was to influencecourts (including contending counsel)

to decideevidence questions so as to achievejustice, on average.Wigmore therefore tended to

makemore sense of historythan probably was originallythere and to ignorecases thatdid not

makesense from his point of view. He also was notan ethnographertrying to reflect accurately the

informalaspects of theuse ofevidence law in practice;his purposewas to be authoritative rather

thanethnographic. Wigmore believed in institutions and in scholarshipas a wayto improvethem.

My ownview is thathe succeeded,but his purposeis differentfrom my purpose here of showing

thathe was rightabout how the courts worked as institutions servingjustice. Because I do notknow

thecases and historyas well as he did,I am notin a positionto criticizehis analysisfrom within

(Twining1990 has somerelevant material). Sociologists think of thelaw of evidencemainly in

connectionwith constitutional cases on criminallaw, especially for capital crimes against persons.

Wigmorewas wellaware that most law practiceis law on economicclaims deriving from contract

and propertyand thatit has moreto do withthe contract clause in theConstitution than with the

Bill of Rights,and mostcrime is againstproperty. So formy purposes here, he is analyzingan

economicallyrelevant institution, court procedure on evidencequestions.



whichother elements of thefirm have a competitiveadvantage over outside

firmsproviding the same servicesor goods in themarket, because of lesser

"transactioncosts." Schumpeter is the classic source on the relation to the larger

competitivestructure of capitalism of that monopoly advantage that comes from

a firm'shaving superior productivity. All threewriters are interested in the form

ofinstitutions that makes the competitive structure of capitalism possible, given

whatthat structure is, namelythe competition of firmsthat can do something

betterthan anyone else.

The impoverishedview of moderninstitutional theorists (especially in the

''organizational ecology branch") reduces the conception of competition to that

ofthe relations among organizations2 that have the "legitimate" organizational

formfor that "population." This conceptionleaves out many aspects of what

thetraditional institutional theorists actually thought about competition. The

transactioncosts literature (e.g. Williamson1975) preservesmore of this con-

tent,except that it does notstudy legitimacy of themarket itself, and so it has

a vacuousdescription of whatfirms (as hierarchies)are contrastedto. The

conceptionsof Commonsand Schumpeterof howcompetitive markets came

to be legitimateare notvacuous.

The secondpart of this chapter concentrates on howcontracts in themarket

cometo be legitimateby the way they are constituted, by the mutual belief of the

contractingparties that each is committedto theline of action promised in the

contracts.We emphasizeespecially the commitment ofa firmto be competent

in thefuture to carryout the activities specified in thecontracts. Contracts are

whatmarkets centrally consist of, so theirlegitimacy is centralto the legitimacy

of markets-a factwell knownto institutional economists in thepast. Coase

thenanalyzes what it is aboutthe firm that is thenoncontractual basis of con-

tracts,namely its special competencies. Commons analyzes these as theyare

embeddedin workingrules, while Schumpeter treats them as innovationsthat

have specifickinds of effectson thecapital market and thereforeon business

cycles. Selznicktreats the processes by whichcommitment to competencies

are builtinto organizations.

The thirdsection treats the problem of thelegitimacy in thelaw of market

competitionas a system,and itsrelation to thelegitimacy of beingable to do

thingsbetter than competitors as a moraland legal claim on theprofits of such


The fourthsection is an analysisof a classicformulation

of the failure of in-

stitutionsby Edward Banfield, especially in his The Moral Basis ofa Backward

Society(1967 [1958]). Banfield'sbasic argumentis thatinstitutions,

and com-

mitmentto institutions,

are essentialto thecreation of publicgoods. In turn,

2Thefirms are assumed to be identical,each firmcounting as one,in mostapplications.



economicprogress involved the production of public goods, including obvious

onessuch as roadsor civil order, and not so obviousones such as thewillingness

todiscuss what we shoulddo nextin a spiritof honesty and compromise. When

theinstitutional means to createpublic goods are notavailable, welfare seems

to people to dependon lookingout forthemselves and theirimmediate kin,

ratherthan on tryingto create greater welfare for all. Banfieldapplied this anal-

ysisto SouthernItaly. Diego Gambetta(1993) has a compatibleanalysis about

whythe Mafia as a businesssupplying guarantees for contracts in a distrustful

environmentdoes notconstitute a good basis foreconomic development.

  • I applythis line of argumentto explainwhy capitalism in Russia is not

as successfulas it has been in theWest-perhaps not even as successfulas

socialismwas-because thesocialist institutions that enable people to create

publicgoods have been destroyed but not replaced by institutions appropriate to

capitalism.In particular, I argue that, under socialism, contracts between firms

andthe corporatist industrial authorities in central planning agencies were used

to createmany of therequisite public goods. The destructionof thecapacity

of thoseauthorities to rewardfirms for public-oriented behavior has leftthe

enforcementofcontracts to Mafia-like organizations, as inSouthern Italy when

Banfieldwas there.

Olderinstitutionalists did not assume that institutions were always there and

alwaysworked. Consequently the causes of variationin theeffectiveness of

institutionswere part of Banfield'sresearch program. The creationof public

goods is particularlyproblematic in a warof each againstall. Institutionscan

(butneed not)reduce the impediments of thefree rider problem, that people

can benefitfrom public goods without contributing to their creation. The level

ofsuccess in creating roads, or law andorder, or bargaining in good faith are all

sensitiveindicators of institutional effectiveness. The "amoralfamilism" that

Banfieldfound among Southern Italian villagers has itsanalog in the"amoral

firmism"of postsocialist Russia, and in the mafias, a gooddeal like the southern

ItalianMafia, that enforce contracts.

These are fourrather different arguments. The firststudies a clearcase in

whichlegitimacy of ritualsin courtroomsvaries with how well theysubstan-

tivelyachieve justice in the use ofevidence in the law andso producelegitimate

decisions.My argumentis thatunless the rules of evidence are guided by con-

siderationsof justice, they do notproduce legitimacy. The secondstudies why

firmsare willing to enter into contracts that require the counterparty tomaintain

intothe future the competence to do theservices contracted for. The argument

is thatonly if firms are committed in severalways, including morally, will that

promiseto maintaincompetence be believed. The thirdoutlines why it ever

becomeslegitimate for competitors to do damageto each other,and howcivil

law has had to be arrangedso thatthat competitive conflict gives rise not to


claimsin court,but instead to "legitimate"competition. Schumpeter makes

strongarguments that economic development depends on innovators, firms that

do notimitate other firms but are nevertheless legitimately able to do damageto

entrenchedbusiness interests. And he andCommons both argue that this legit-

imacyof competition has alwaysbeen precarious, and that only a fewkinds of

institutions can successfully institute it. Finallywe studyinstitutions that some-

timesdo notwork, and Hobbes's outcome of the war of each against all reigns.

Banfieldargues that when institutions do notwork to createpublic goods, the

incentivesto morality and cooperation that otherwise flow from successful cre-

ationof public goods (e.g. higherincome from economic development) fail to

operate.Then only mafias, with the kind of consentthey elicit, create even a

primitivesocial order,a noncontractual game theoretical basis ofcontract that

does notwork as well as businessethics and effective civil law.

The overallargument of thesefour subarguments is thatthe blank places

in writingsof moderninstitutionalism come especiallyfrom lack of detailed

theoryand researchabout how particular institutions work. Much of thenar-

rownessin moderninstitutionalism in organizational theory is explainedby

lack of detailin theconceptions of institutions. A narrowconception is eas-

ier to mathematize. This in turnis due to ignoringthe work of people who

putthe detail into institutions and who constrainpeople and organizationsto

conformto institution's exteriority. But if the guts of the causal process of insti-

tutionalinfluence are leftout of the model, then we successfullymathematize

abstractempiricism, an empiricismwithout the complexity of real life. Wig-

more,Commons, Schumpeter, and Banfield knew a lotabout variance in how,

and howwell, institutions work; it behooves us to imitatethem.

RitualMeans ofSurvival vs. InstitutionalizedValues

It is theduty of United States appellate courts to behave exactly as specifiedin

institutional theory, namely to takeas theirprinciple of decision and of writing

opinionsthe institutionalized standards specified by the Supreme Court. These

and otherinstitutionalized standards are embeddedin thelegitimate decisions

at commonlaw and statutelaw, defined as thosethat other courts, including

the SupremeCourt, would recognizeas valid. Thus accordingto the new

institutionalist principles announced in Meyer & Rowan(1977), thecourt orga-

nizationswith their contending counsel, judges, juries, and flows of witnesses

are engagingin theformalities of evidencelaw as a ritualto legitimatewhat

theyare doing. If therewere no deeperprinciples behind this activity, there

wouldbe no sense in theirwriting opinions about why they decided the way

theydid, no reasonfor either of thecontending parties to appeal,and so no

reasonto pay forappellate courts at all; itwould be sufficientfor them to say

thatthe Supreme Court would probably favor the plaintiff (or thedefense).



Thus it is onlybecause we imaginethat justice will be servedthat we set

up thewhole apparatus of appeals-of judges guessingwhat each otherwill

say-to demandthat they obey the legitimizing formal procedures that Meyer

& Rowanspecify and Wigmoreon Evidence(1983 [1940]) describes.In short,

theacceptance of theidea thatthe appellate court was a ritualwould destroy

itslegitimacy. And it is clearthat the written opinions of appellatecourts are

centralto theallegation that it is notjust a ritual,which could as well have

been dispensedwith by allowingthe court of originaljurisdiction to specify

whatwas legitimateunder the Constitution and to makeits ownguess about

theSupreme Court; and the Supreme Court could in itsturn merely send back

a yes or no,without majority and minority and concurring opinions.

Similarlyin scientificpapers, the formal rituals of citation of scientists other

thanthe author show that the author is orientedto contributingto a bodyof

knowledgerecognized by others; there is no obviousritual reason for the results

sectionthat actually makes that contribution. We could enormously simplify the

formalorganization ofjournals if we did not have to have referee comment on the

resultssection. There is thesame trouble in explaining the actual algebra in an

algebratextbook adopted by the California or Texas state textbook certification

organizations,the actual fertilizer that backed up thecoopted farmers on the

TennesseeValley Authority boards (Selznick 1949), the actual "cleaving only

unto"that is theputative organizational consequence of the wedding vows, the

actualdollars that back up theannual report of a corporation.

Whatwe haveto explain,then, is whyit is so essentialto organizationsthat

theirformal rituals not seem to be a shuck,and why they lose legitimacyas soon

as it appearsthey are onlyinterested in theletter of thelaw, the words in the

vows,the places on theTVA boards,the right number of pages in thealgebra

books. Whydid I, forexample, get indignant when my son in thepreschool

learnedthe correct answer that it is hotterin summer because then the Northern

Hemisphereis closerto thesun, and he favorablyimpressed the educational

authoritybut not his fatherby "gettingit right"'?I was dissatisfiedwith the

preschoolbook because its answer was substantivelywrong, not because it was

notofficially authorized.

We do findformal ritual criteria of whetheran appellateopinion is serious

organizational substance; for example, what court an opinioncomes from mat-

tersfor its ritual status. But whyis it thatintermediate appellate courts take

producingopinions with those ritual marks so seriously,as opposedto saying

theyguess the Supreme Court might decide yes (or no) and leavingit at that?

Whywould we be dismayedif an appellatecourt opinion had all thecitations

ofcases butmissed the point-more dismayed than if it missed citing a crucial

case andso hadto invent the principle of justice over again? Why would we be

less dismayedif a schooltaught analytic geometry before Euclidean geometry,


outsidethe canonical order, than if students never learned to treatgeometrical

problemswith algebra'?

In short,why is formalitynever enough for legitimacy, without some convic-

tionthat the formality is just a moreabstract form of the substance? Why is it,

forexample, that a principleof legitimacyof a contractis "(d) The courtshall

determinewhether the writing was intendedby the parties as a finalexpression

oftheir agreement with respect to such terms as areincluded therein" [California

Code of Civil Procedure(as amendedin 1978),as quotedin Wigmore(1983

[1940]) p. 75n]? The institutional rule here relies on a substantivedetermi-

nationabout the wills of theparties, rather than just a formalreading of the

contentof the writing.

  • I believewe haverecently underestimated the degree to whichpeople accept

institutionsbecause they think the institutions have the right answer, because

institutions embody a valuethat the people also accept.When Selznick (1949)

showedthat a majorconsequence of "grassroots" administration in the TVA

was thecooptation of leadingpotential farmer opponents of TVA intothe de-

fenseof governmentpower generation in theValley, we all thoughtthis made

TVA'sclaim to be democraticmore suspect. Formal democracy was notgood

enoughfor us. Whywould we expectthat it wouldbe good enoughfor other

studentsof public administration orfor citizens? We, too, did not want the TVA

to go throughthe democratic motions, because we holddemocracy as a value,

notas a legitimator. Its legitimating capacity follows from its being a value.

We could investigatethis by lookingat whichsocial movementssucceed

againstformally institutionalized practices. For example, Jeremy Bentham un-

dertookto arguethat the formality of therules of evidencein his timeun-

derminedthe use of reasonand good sensein legal inference(Twining 1990,

pp. 38-41). The old institutionalist theory of Selznick and others is thatreason

and good sense are values,and formalitya means to reasonand good sense.

Selznick'stheory would predict Bentham's success. The viewthat justice mat-

tersto thelegitimacy of theformality would predict that the law of evidence

afterBentharn would come to put a gooddeal morefaith in the discretion of the

judge,a gooddeal lessfaith in formal versions of the precedent in evidence law.

And thatis whatthe modern textbooks on thecodified statutory law ofevi-

dencesay (Rothstein1981, pp. 10--12).In partthe new institutionalism would

predictthat Beutham should have lost out, particularly among lawyers who are

dependenton predictingwhat the other lawyers that run the courts will decide.

The professionof law dependson isomorphism, that the arguments they make

will be thesame as thearguments the courts will accept. It seemsrather that

lawyerswanted instead for judges to use reasonand good sense,and notbe

boundby institutionalizedrules except those that specified when and on what

groundsthe judge could intervene to use his/hergood judgment. That is, inthe



longpull, lawyers favored rules that used the reason and good senseof judges,

ratherthan formal rituals of correctness.

Forexample, one observes in the law ofevidence that the criteria of evidence

areapplied much more strictly when a hearingdeals with substantive rights than

withthe formalities of the course of an issuethrough the court system, so that

hearingson a changeof venuehave very informal rules of evidence.Further,

thelaw is morepainstaking when the rights at stakeare moreserious, as in

criminalcases comparedto civilcases (e.g. exclusionsof evidencebecause it

was illegallyobtained are muchmore common in criminalcases), in criminal

trialsas opposedto grandjury indictment hearings (e.g. thegrand jury rather

thanthe defendant decides what evidence the defendant can offer),in habeus

corpushearings than bail bondhearings, in cases of childcustody rather than

childsupport levels, in searchand seizureof evidencerather than discovery

hearings[Wigmore on Evidence(1983 [1940]) vol. lA, pp. 25-332 gives a

summaryof variationsin thelaw ofevidence according to jurisdictions].3 The

morejustice matters, in short,the greater the formality of the application of the

law ofevidence.

Thispoint is crucialto our differences

with the new institutionalism.

We want

to predictwhen the institution will demand more formality, not when the orga-

nizationwill moreenthusiastically adopt the institution's standards, as Meyer

& Rowan(1977) do. It is preciselybecause the behavior of institutional author-

itiesin enforcingstandards varies that it is importantto noticethat institutions

are staffed,rather than being merely collective representations.

Similarly,votes in academicdepartments

are counted much more carefully,

and thevotes are morelikely to be by secretballot and keptconfidential (the

doctrinebeing that one getshonest opinions only with immunity of thevoter),

whenthe issue is a crucialmatter such as a tenurecase. Anotheracademic

example: Graduatestudents are sentritually out of theroom when their dis-

sertationdefense is beingdebated and votedon, butnot in a seminarwhere

theircontribution to discussion is tobe debated.The criteriaand procedure for

examinationsand theirgrading are oftendiscussed in thesyllabus and in fac-

ultyhandbooks, whereas when the professor will actually appear for his office

hours,as opposedto whatis announced,is moreinformally discussed by angry

studentsoutside his or herdoor. In short,the more a judgmentof academic

3Whensubstantive rights are dealtwith in administrative

hearings (e.g. hearingson welfare

rights)or by agreedarbitration, more informal laws of evidenceapply. Here we wouldpredict

thatthe more important the substantive right, the more formal the rules of evidencecompared to

otheradministrative hearings or arbitrationproceedings. Similarly Jerome Skolnick argues (1975

[1966],pp. 155-161)that the bigger the case, themore careful police are to followthe dictates of

thelaw ofevidence as wellas otherdeterminants

ofthe quality of evidence (e.g. policemenmake

betterwitnesses than drug dealers), because they know evidence will be evaluatedmore strictly.



meritmatters, the more formalized and institutionalizedwe findit to be. It is

hardto imaginethat this is all a matterof impression management, that no one

reallycares whether students and junior faculty are evaluated by what they have

accomplished,rather than by formallycorrect procedures. But in particular,

institutional authorities demand more conformity with institutional values the

moreimportant the decision is.

My argumentthen is thatvariations in thebindingness of institutional


areto be explainedby beliefs about what the institution is for. The moreimpor-

tantthe issues at stake, the more important will be thoserituals that are carefully

justifiedas servingthe value. As a criminalcase passes fromquestioning on

thestreet, to arrest,to indictment, to conviction,the degree of bindingnessof

therules that make evidence legitimate increases. As thecareer consequences

of an academicjudgment increase in importance,the greater the formality of

thespecification of what is tobe judged, the more likely committee rather than

individualjudgment, the larger the number of stages,and themore the rights

of appeal. As a negotiationof a contractproceeds, so increasesthe degree of

formalityof judgment about what has beenagreed to, whether the agreement

is final,and whetherthe terms have been made clear either during the process

ofnegotiation or by reference to thepractice in a trade.

Formalityand ritualization, then, increase with the substantive importance

of theissue, because in generalthe reason for having things institutionalized

and ritualizedis thatthey matter. Or to putit theother way around, when the

valuesystem informing an institutionranks something as ofhigh priority, it is

morelikely that the keepers of theinstitution will formalizeconformity with

theinstitution in a ritualdesigned to monitor,enforce, and enactthe value of

thatsomething. The higherthe priority, the higher the formality and ritual.

The moreritualized a thingis in an institution, the less it is merelya ritual,

becausethe more substantively important it is. Or to returnto ourexample of

evidencelaw, the more justice depends on a bitof evidence,the more formal

evidencelaw thereis aboutthe introduction ofthat evidence.

TransactionCosts vs Moral Commitment

The contractsthat constitute a marketare ordinarilyagreements about future

performances.It is thatfact that makes the noncontractual

part of contracts

central,since the parties' predictions of each other's future behavior depend on

predictionsabout each other'sfuture morality. But in particular, one routinely

contractsfor another firm's services when that firm can do somethingbetter

thanone can do itoneself. Consequently, itis in particularthe sort of morality

thatwill guaranteethe otherfirm's future competence that is centralto the

creationof most markets. If in thefuture the other firm is notgoing to be more

competentat theirbusiness than you are, why make a contractwith it?



To relatethe old institutionalismto the institutionalism of transaction cost

analysis,it is bestto startwith old transactioncost analysis, in Coase (1937).

Coase definedthe maximizing boundary of a firmas thedivision between the

setof things it could do betteror cheaper than it could hire or buy. An airplane

developerand manufacturercan makeplanes better than an airlinecan. But

it can onlyborrow the money to developa passengerplane if airlinessign

contractsin advanceto buy(Newhouse 1982). Airlineswill buy them for the

futureonly if they believe manufacturers will seriously and competently use the

moneyto developand make a betterairplane. Airlines will make commitments

onlyif the airlinesin theirturn believe they themselves will stillbe able to

competein sellingtraveling and express shipping services.

In particular,airlines will have to sell airlineservices better than Boeing,

Lockheed,or McDonnell-Douglas, for if the manufacturers were better at run-

ningairlines as well as at buildingairplanes, the airlineswould merelybe

financingtheir competition. Bankers only believe the futures contracts between

airlinesand airframe manufacturers ifthey think the manufacturer can andwill

builda betterairplane, and theairlines will stillbe thereto buyit whenthe

contractcomes due. It is an immediatederivation of Coase's

theorythat part,

at least,of thenoncontractual element of contracthas to be

mutualbelief in

each other'sfuture superior competence. Much of one's transactioncost has

to do withtrying to guaranteeby contractualmeans the future competence of

thecounterparties, without giving over to themthe rent of one's ownsuperior

futurecompetence in one's ownbusiness. The natureof this system of mutual

beliefin each other'scompetence becomes particularly clear when a greatdeal

of money,now and in thefuture, has to pass betweenthree different kinds of

firms,each relyingon thesuccess of the relation between the other two.

The expectedreturn of all thetransaction costs of these development, manu-

facturing, and loan contracts ultimately depends on thefaith of all threeparties

thatthe manufacturer will show devotion to buildingbetter, cheaper, and safer

airplanes.Unless thereis competenceand will behindthat transaction-cost

boundary,unless Boeing or Lockheedor McDonnell-Douglascan reallydo

somethings better than they (or anyoneelse) can buyon themarket, the whole

web of contractscomes crashingdown. Likewiseunless the airlines behind

theirfirm's equilibrium boundary can do theirjob, therewill be no moneyto

pay forthe better plane, so in turnno moneyfor the manufacturer to pay the

banker.The same,changing the changeable parts, holds for the banker pricing

risksresponsibly for the capital market, and using banking equity to back other

contractsthat split up therisks for appropriate parts of the capital market.

Transactioncosts are worth paying, then, only when there are two (or in this

case at leastthree) firms believably trying to be anddo whatit takes to be best

at theirown business. Only if a firmcan be believedwill any other firm prefer



it to internalactivities, thus creating the boundary between the two firms and

thenecessity of a contract.

Similarly,a universitycontracts out its janitoring and wasteremoval tasks,

butkeeps its research and teachingin-house, because it has a believablecom-

mitmentto scholarship,and no noticeablecommitment to clean buildings.It

is theuniversity's commitment to researchand teaching that ultimately makes

thewaste management firm believe it willbe paid forits contract, for the uni-

versity'soverhead costs will be paid onlyif studentsand grant-givers believe

theuniversity can and willdo itsjob. Similarlythe hospital buys a CATSCAN

machinerather than build one itself,with the income or creditderived from

its credibilityto a clientwho thinkshe mayhave had a stroke.If theclient

choosesthe wrong hospital, that does notknow enough to buya CATSCAN

machine,he mightnot get a secondchoice. And the CATSCAN manufacturer

thatsells to a hospitalthat cannot attract stroke patients will not be paidfor the


The "hierarchy"(Williamson 1975) thatlies outsidethe market, protected

by transactioncosts barriers, has to be a thingthat produces reliably on into

thefuture, so thatits predicted future competence justifies paying transaction

costs now. The transactioncost (a cost of risk)of goinginto the emergency

roomof a hospitalwhen one is perhapshaving a strokewill only be paid ifone

thinksthe medical workers care enough to be competentand to stay competent,

to workeven through their daughter's seventh birthday party if necessary,to

triagemainly on thedegree of urgency,to buya CATSCAN machinebefore

one has evenhad thestroke, and so on.

Of course,the degree to whichorganizations create their distinctive compe-

tenciesby moralcommitments is a variable.And theexact definition of what

we wouldmean by that variable is difficult-presumablymanagerial commit-

mentis moreimportant than the commitment of hewersof wood and drawers

of water,for example. But I imaginethat we will definethat variable more

exactlyby extractingindicators of it fromSelznick's Leadership in Adminis-

tration(1957) thanby abstracting

them from OliverWilliamson (1975), because

Selznickwas primarilydeveloping a theoryof the "distinctive competence" of

an organization, its ability to realize values in a wayno other organization could.

Birthand Death vs Institutionsof Creative Destruction

Schumpeterthought that many economic institutions that facilitated capital-

ismas we knowit depended on valuesother than capitalism. Imperialism and

mercantilismwere driven by thevalue of poweras muchas by profit.La-

bor disciplinecould probablybe achievedmore easily by socialismthan by

a capitalismnow shornof itsfeudal governing classes. Valuesof democracy

empiricallyassociated with capitalism depended in theirturn on competing



politicalelites who wanted to governfirst, profit from government afterwards.

Schumpeterperhaps fits uncomfortably with Selznick as a comemberof an old

institutional school. But one ofthe positions he holdsin commonwith the old

institutionalists is that the form of competitionamong organizations is histor-

icallyvariable, depending a good deal on thevalues of thegoverning classes

and theirchallengers.

In Schumpeter'sargument the ruling institutions

affected organizational ecol-

ogy,and in particular what he called"creative destruction" (Schumpeter (1964

[1939]), 1942). In thelong run, the big competitors of an earlierpopulation of

organizationsare new; later, populations of organizations of a differentsort that

reshapethe niches on whichearlier organizational populations depend. If it is

truethat the oxygen atmosphere of earth was createdby thefirst chlorophyll-

usinganaerobic populations, causing the long-run shift to oxygen-breathing

animalsand "creativelydestroying" most anaerobic strains, then biological

evolutionhas powerfulanalogies to Schumpeter'sreasoning. Thus to ana-

lyze thewithin-species or within-"organizational population" competition is

to missthe big storyof evolutionand of economicdevelopment: interspecies


ThusSchumpeter was primarily interested in the institutions that allowed the

peaceful4destruction of wholepopulations of organizations. To putit another

way,he wanted to know how modern society created such precarious legitimacy

fora giventype of organization that the jobs, profits,or community-sustaining

contributions of wholeindustries could be destroyed.If someoneelse builta

bettermousetrap, all theaccumulated legitimacy that accounted for the first

partof theclimb of theold populationof cat breedersup theGompertz curve

was notapparently enough. Schumpeter regarded this precariousness of the

legitimacyof old populationsof organizationsas remarkable, and he therefore

regardedthe institutions that allowed such destruction of people's livelihood as

precarious.He arguedthat it was suchcreative destruction that caused depres-

sions(Schumpeter 1964 [1939]),and he was politicalscientist enough to know

thatgovernments and theeconomy were confronted with challenges to their

legitimacywhen they allowed such destruction and itsaccompanying depres-

sions.He thoughtthe remarkable institutions facilitating competition between

speciesof organizationswere extraordinarily precarious.

But I thinkthe definitive analysis of whatthese institutions

were is JohnR

Commons's(1974 [1924]),especially his careful definition of the legal protec-

tionof competition(1974, pp. 83-134). Commonsstarts his analysisof what

legitimatecompetition means for capitalism by distinguishing

the legal defense

4Atleast Schumpeter preferred peaceful destruction-he knew that organizations and institu-

tionswere often created and destroyedby conquest,but he thoughtthat was bad foreconomic

development.As does Gambetta(1993).



of"working rules" of firms in competition5 that are distinctive to a givencorpo-

ration.These are defended legally in the sense that only the Board of Directors

of a corporationcan allocatethe property of thecorporation or permitaccess

on theshop floor, and evenstockholders cannot take away a latheor four days

ofa firmelectrician to satisfy their property interest. Interference

with working

rulesinvades the legally defended autonomy of a competitivecorporation, the

autonomyto havedistinctive rules that allow them to do somethinginnovative

thatcan routinelygive a monopolisticadvantage in a nichein a market.When

thisis combinedwith an opportunityin themarket (Commons 1974 [1924],

pp. 153-157),it producesa "goingconcern value," and theinstitutional pro-

tectionof economicopportunities distinctive to capitalismis theprotection of

thatgoing concern value (Commons 1974:172-213).

WhatCommons (especially when combined with Schumpeter) managed to

do, then,was to jump overthe institutionalism of organizational ecology of

one population(developed especially by Adam Smith for firms, and theorized

differentlybyHannan & Freeman1977, 1989 recently) directly to the establish-

mentof an evolutionaryecology of multiple competing species (defined by their

workingrules and by the opportunities-or niches-those exploit). Commons

was an institutionalist and thought these were defended in the legal institutions


capitalism.When hooked together they explain also whyTobin's q-ratio

of themarket value of corporationsto thereplacement value of their assets is

ordinarilygreater than 1 in economicbooms (Tobin & Brainard1977), why

thereare business depressions in which that ratio goes down in populations be-

ingeliminated, and whyboth boom and, more surprisingly, bust are defended

by institutions. There is no place forinstitutions to abolishorganizations on a

largescale in modernorganizational ecology-they only legitimate them.

Darwinianevolution does notneed institutions defending competition either

withinor between species. Humans defend themselves socially from competi-

tionby tariffbarriers, racial prejudice, conspiracies in restraintof trade, guild

regulations,patent offices, professional societies and licenses to practice, trade

unions,zoning regulations, protection rackets, immigration and naturalization

services,conquest of competitors, and the genocide of indigenous peoples.

In humanhistory, competition has not ordinarilybeen legitimate.It is a

wonderthat modern organizational ecologists have not noticed this. Most insti-

tutionalconditions restrict competition. Institutions that allow people's liveli-

hoods and capitalto be destroyedby competitionare rare.Schumpeter and

Commonsknew that and considered the legitimacy of "exposure" to other peo-

ple's "liberties"the mainthing to be explained.Capitalism, particularly its

legitimatecompetition and creativedestruction part, is notat all naturalbut is

5See also essentiallythe same concept in "routines"in Nelson& Winter1982.



insteadan institutional

creation. To use legitimacyto explainonly the upswing

of organizationalgrowth rates, and to forgetthat the legitimacy of intensified

competitionby firmswith innovations that destroys large legitimate popula-

tions,would have seemeda peculiarblindness in thedays of Commonsand

Schumpeter,when Smoot-Hawley tariffs and immigrationquotas were in the

land. The precariouslegitimacy of maquiladorasover the border in Mexico

mightteach us againthat competition itself is stillnot very legitimate.

ThatSocialist Institutions Do Not WorkDoes NotMean CapitalistOnes Do

In manyEast Europeancountries the populations have decided that they have

triedcapitalism and it does notwork, so theyare votingtheir old communist

leadersback in. In theold institutionalism, the failure of capitalismto work

in southernItaly was also arguedby EdwardBanfield, in TheMoral Basis of

a BackwardSociety (1967

[1958]). The basic idea ofthat book was thatsome

sortsof institutionsundermine capitalist organizations, and that they do so by

failingto provide integrity inthe achievement of public goods (law andorder-

especiallycivil law, city organization, roads, or economic development offices

facilitatingfactory and firm foundation).

Banfield'sbasic notionwas thatif the nuclear family was so set up thatits

solidarityand interests invariably overrode those of other institutions, then those

otherinstitutions could not do theirjob. Institutions that depend on generosity

of spiritand attentionto collectivewelfare are especiallyvulnerable. Part of

institutions' job was legitimatingthe fulfillment ofoccupational and leadership

obligationsin firmsand in economicallysignificant government operations.

Large-scalecorruption then in arenas requiring integrity inthe pursuit of public

goods is an outcomeof a particularway of institutionalizingfamilies. The

Mafiaand Cosa Nostraare in a certainsense not institutions because they are

in thebusiness of corruptingwhatever institutions get in theway of short-run

maximizationof nuclear family interests (on theSicilian Mafia, see especially


The basic pointcan be illustratedif we considerthe role of accreditation

associationsin education, the field where Meyer & Rowan(1977, pp. 354-356,

citingtheir 1975 paper) first observed the powerful role of institutions.


itationsocieties do nothave many formal powers, nor resources to distribute;

theyhave only moral powers. One of theconsequences is thatthey very gen-

erallyask forvolunteers from several educational organizations to go inspect

anotherone. Now imaginea SouthItalian or Siciliansocial organizationas

describedby Banfield sending out unpaid volunteers and making them hold to

educationalstandards of thesort Meyer wants to explain,but without making

an offerthey can't refuse.Paying off the accreditors would surely make the



formalreport into even more cant and ritualthan Meyer observes. A phrase

fromTeamsters' leader Jimmy Hoffa in a tradeunion debate over political ac-

tionoccurs to me: "Thereare two kindsof politicalaction. You can make

speeches,or you can givemoney. We givemoney." If schoolsgave money for

accreditation, would the rituals of formal organization be convincing?

Theextension of Banfield's institutional

argument to capitalism can most eas-

ilybe seenby calling on a reallyold fashioned institutionalist, Emile Durkheim

(1933 [1893]). Durkheimheld that the division of labor rested on thenoncon-

tractualelements of contract, the commitment tovalues of commercial honesty,

nonstrategicuse ofbankruptcy, advertising with some information value, com-

petencein one's occupation,and thelike. Banfield'sargument then might be

read as assertingthat both the contracts between firms, and betweengovern-

mentsand firms, are notinstitutionalized

under "amoral familism."

Now back to theattempt to introducecapitalism in EasternEurope. The

languagedescribing Sicily is oftenused to describe the economic arrangements

in capitalistRussia; the"mafia" in Russiadoes nothave to be importedfrom

SouthernItaly. The legitimationof institutional relations under socialism was

byway of the purposes of government, as manifested in governmentmeasures

of outcome,government subsidies of production that was considereda public

good,and the like. The contractbetween a firmand the government was hardly

deeplytheologically grounded, but it had noncontractual elements in thesense

thatother parts of the government would back up thecorporatist industry glavk

and helpenforce conformity on thefactory manager.

This centralplanning legitimation system for supply, quality control, mea-

surementof productivity, labor relations regulation, pricing and paymentfor

deliveryof finishedor semifinishedgoods, and so on, no longerlegitimates.

Calvinismgiving supernatural sanctions for commercial integrity seems to be

thinon theground. The capacityof the population to create public goods, such

as industrystandards-setting,

credit extension and its credit-rating

system, hon-

estbrokerage in stockand bond markets, is crippledbecause that capacity used

to be all embeddedin thecentral planning system. The lack of intermediate

corporatebodies with legitimacy of their own based on the expectation they will

liveup to theirown moral system then produces a conditionlike that Banfield

called amoralfamilism. And that is notgood forcapitalism in Russiaor other

East Europeancountries, any more than it was goodfor capitalism in Southern


Ring Out theNew, Ring In the Old

The basic postulatehere is thatorganizations that work well do so by paying

peopleto servevalues, to tryto be competent,to conducttheir business with

integrity. Itis easyto exaggerate the incentive effect of the payment, and to treat



it as if it wereonly a game-theoretical token. But paymentis an institutional

tool as well,for we pay forthings we believein. I wouldargue that paying

forthings we believein is thecore of what an institutionis. We accepttokens

of creditrather than money incentives in algebraclasses, and pay people to

teachthem, because we believein algebra;the teacher does notget to cash in

theA's he or she does notgive out as in game theory,and thestudent does

notget to cash themin at thestore. Their only value is thateveryone believes

thatthere was somereal mathematics behind them. Even newinstitutionalists

at Stanfordbelieve in algebraand are willingto pay forit, and theydo not

wantto givethat money to a schoolthat does notbelieve in algebra.Nor do

peoplewant to givemoney to insurancecompanies that won't pay whenthey

die, nordo theywant to buyportable hard disk drives from a companythat

doesn'tanswer its technical help line,6 nor to trustmost of the capital markets

in EasternEurope. The combinationof resources and believable commitment

can onlybe created,so theold institutionalists argued, if peoplebelieve that

theinstitutional enforcers themselves believe the values.

Onlywith that assumption, for example, can we explainwhy capitalism can

firstlegitimate the horse-and-buggy industry and then legitimate the automobile

industrythat destroys it, without changing the basic institutions of capitalism.

Andit takes the failure of the assumption that enforcers of commercial contracts

believein honestdealing to see whythe Russians and Ukrainiansknow so

well thatcapitalism does notwork: the institutional enforcers do notbelieve

thatcommercial honesty is possible,so theydo notbother to createit. The

assumptionof transactioncost analysis is thatone can go outon themarket,

pay all thetransaction costs, and (sometimes)get better performance than one

could produceoneself. It is onlythe contrastof thatmarket contract with

whatthe firmcan do betteritself that makes the boundaryaround the firm

or hierarchyan equilibriumin Coase's sense. But one cannotexplain why

thereis anythere there unless one is willingto believethat transaction partners

will deliverthe goods, will maintainthe competence and responsivenessthat

makesthe supplier's work superior to whatthe firm can do itself,at leastuntil

thecontract is fulfilled.One paysthe transaction costs by contractingwith a

supplierwith competence superior to one's own. Otherwisethe equilibrium

firmsize is thewhole economy, perhaps as in theold USSR.

In short,the trouble with the new institutionalismis that it does nothave

theguts of institutionsin it.

The gutsof institutions

is that somebody some-

wherereally cares to holdan organizationto thestandards and is oftenpaid to

do that.Sometimes that somebody is insidethe organization, maintaining its

6My advice is to call thetechnical support number before buying-Iomega has a wonderful

computerizedphone system for giving a clientin troublethe runaround.



competence.Sometimes it is in an accreditingbody, sending out volunteers

to see ifthere is reallyany algebra in thealgebra course. And sometimesthat

somebody,or his or her commitment, is lacking, in which case thecenter cannot

hold,and mere anarchy is loosedupon the world.


BrianGran and StephenBarley made detailed comments on

a previousdraft,

CarolHeimer disciplined my tendency to precious writing, and Richard Lempert

madedetailed comments on thenext-to-the-last


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