II. LITERATURE REVIEW
2.3. Political and social foundations of institutional systems
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elements, and by so also fails to explain variation in welfare and institutional evolution between countries.
2.3. Political and social foundations of institutional systems
Rational choice institutionalism perceives institutions as equilibrium are established due to the aggregate efficiency of the institutions and as near optimal ways of organizing coordination of stakeholders among the actors. But the empirical problem is that once an institutional equilibrium is established – a balance point – the organization of society should be relatively stable, but the empirical evidence of continuing year-to-year 10-30%
emergence of new firms (OECD, 2016a) suggests the institutional equilibriums are only approximate ones and disequilibrium is a constant feature of market economies (Höpner, 2005). Moreover, equilibrium is not natural or a priori designed by a master designer but within the potential of multiple equilibria – without efficiency as a selection mechanism – the societies endogenously, with experimental firms, create shared understandings, common knowledge and beliefs to coordinate a specific functional institutional equilibrium (Hall & Soskice, 2001, p. 13; Greif & Laitin, 2004; Streeck, 2004; Crouch, 2005; Becker, 2007; Hall & Thelen, 2009).
Therefore, institutional equilibriums are tightly founded on social and political institutions, where efficiency is even a secondary concern for the actors (see Streeck, 2016; Amable & Palombarini, 2009; Hall & Thelen, 2009). Effectively, the social and political dimensions of institutional systems are even crucial for the stability of the institutional equilibriums as actors are required to internalize and perceive institutions as legitimate (Greif, 2006, p. 22; Aoki, 2007; Hall & Soskice, 2001; Ostrom, 2005; North, 1990). Importance of socio-political preferences of societies in creating institutions however thus means that institutions are often created for political rather than efficiency concerns (Amable & Palombarini, 2009; DiMaggio, 1988; Fligstein, 2001; Hall, 2009).
Institutional equilibrium is also a socio-cognitive equilibrium as the institutions provide meaning, reference frames and values to social reality where the institutions are often taken-for-granted and subconscious (Ostrom, 2005; Hofstede, 1983). Social and political dimensions are also deeply tangled as powerful interest groups use cognitive institutions
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to portray political institutions as “effective, beneficial, appropriate, inevitable, and so on (i.e., as unproblematic)” (Maguire & Hardy, 2009, p. 151; DiMaggio, 1988).
Thus, without the social and political institutions, institutional equilibriums could not be established nor sustained. This is partially problematic as for example treatise of
„ideology‟ by North (1990) suggests that informal institutions are important for institutional equilibrium, but this problematizes efficiency of the institutions as efficiency of institutions demands priority for unbiased rational evaluation. Additionally, new institutional economics also recognized actors are boundedly rational – intentional but limited in their cognitive capacities – which even in optimal case limit calculative rationality in complex social systems (Simon, 1955). Bounded rationality, self-interest and uncertainty of cooperation among actors reduce incentives and capability to create new more efficient institutions. Similarly, the political foundation of institutional systems begs question how economic efficiency and power relations can be co-fitted without compromising one or the other (e.g. see Hall & Thelen, 2009; North, 1990; Amable &
Palombarini, 2009). Streeck (1991) argued that competitiveness of institutions is a
„beneficial constraint‟, nearly a side-effect of the otherwise entirely political and social construction of institutions. Friedland (2009) has insightfully argued that institutions are economic, political and social with different dimensions tightly tangled and we cannot separate the dimensions of each other (see also Friedland & Alford, 1991). Sociological institutionalism (e.g. Berger & Luckmann, 1966; Meyer & Rowan, 1977; Tolbert &
Zucker, 1996; Friedland & Alford, 1991), similarly to rational choice institutionalism, perceives institutions are often created for coping with material reality and solving collective problems, but as a theoretical body they are more attuned to how history and politics matter, how actors are socialized into institutions (i.e. how social reality appears as objective) and how social reality is (to certain extent) independent of the material reality. Historical and sociological institutionalism often by inductive logic aim to explore how actors create and comply with institutional imperatives, whereas rational choice institutionalism uses deductive logic (Hall & Taylor, 1996, p. 954), and the strength of the inductive approach is understanding how agency and interests are not fixed and exogenous but endogenously shaped and constituted by the institutions (Friedland & Alford, 1991, p. 238-239). Moreover, historical and sociological
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institutionalism importantly perceive that actors enter a social reality full of institutions, with inherited institutions perceived as objective unproblematic parts of the social reality (e.g. Berger & Luckmann, 1966; Hall & Taylor, 1996; Friedland & Alford, 1991).
Institutional systems thus not only influence how actors behave, but also what values and goals they see important and what are appropriate ways to achieve them.
Social embeddedness of behavior drives the creation of institutional systems to provide stability, structure and meaning to social order of societies (Streeck, 2010; Friedland &
Alford, 1991). As North (1990) famously theorized of ideology, the economic, political and social dimensions are tightly interdependent and acting as a system (Friedland &
Alford, 1991). Temporally speaking, the institutions often emerge as solutions to collective problems but as time passes the institutions often receive normative and cognitive status beyond efficiency concerns (Barley & Tolbert, 1997, p. 99).
Additionally, the formal institutions are often ambiguous and lacking of exact behavioral imperatives, which drive societies to “develop and maintain a shared understanding of what the rule say” (Streeck & Thelen, 2005, p. 14-15). Social embeddedness and informal institutions effectively create “the mysterious substance which provides this stability in market exchange” (Beckert, 2007, p. 11; Granovetter, 1985). Therefore, the
„shared understandings‟ can be understood as the necessary socio-political foundation of institutional equilibriums, where the societies create cognitive templates to foster cooperation of actors as the institutional logics act as “taken-for-granted, resilient, social prescriptions, sometimes encoded in laws, specifying the boundaries of a field, its rules of membership, and the roles, identities and appropriate organizational forms of its constituent communities” (Greenwood & Suddaby, 2006, p. 28).
The institutional logics literature similarly to comparative capitalism studies the diversity of economic behavior, but while comparative capitalism studies diversity between market economies, the institutional logics focuses on diversity within market economies (Friedland & Alford, 1991; Thornton & Ocasio, 1999; Lounsbury, 2007; Dunn & Jones, 2010; Greenwood, Diaz, Li & Lorente, 2010; Greenwood et al., 2011). Importance of the theory, especially in comparison to comparative capitalism, is the explicit emphasis of institutional diversity and duality of symbolic and material institutions (e.g. Friedland &
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Alford, 1991). Institutional logics is more attuned to the social embeddedness and necessity to have shared cognitive scripts to empower economic behavior as for example Waldorff and Greenwood (2011, p. 118) argued “institutions depend on institutional logics to make the invisible visible”. Institutional logics, as does sociological institutionalism in general, excellently focuses on social embeddedness of economic behavior as they explicitly perceive that mere compliance with formal institutions is not enough as organizations via social embeddedness require various resources from various stakeholders – which in contrast to comparative capitalism is not achieved via efficacy – but by compliance with normative and cognitive institutions (Meyer & Rowan, 1977;
DiMaggio & Powell, 1983; Suchman, 1995; Scott, 2008). Organizational theories and sociological institutionalism even argue that certain institutionalized practices are independent of the efficacy, and instead rather serve social and political demands of societies (Meyer & Rowan, 1977; Streeck, 2010). Problem of this approach is that while sociological institutionalism accurately captures the diversity of institutional systems and lack of universal logic, but due to the same reason the approach is often merely descriptive and lacks any proper theory of how diversity is created and sustained.
For sociological institutionalism, the organizational efficacy is determined more by environmental fitness than efficacy as for example Greenwood et al. (2011, p. 318) argue
“Organizations comply with logics in order to gain endorsement from important reference audiences and because logics provide a means of understanding the social world and thus for acting confidently within it”. Institutions thus empower behavior and act as resources for coordination but coordination does not imply efficiency as Varieties of capitalism perceives it. Institutional complementarities (Hall & Soskice, 2001) thus do not necessarily lead to efficiency as the complementariness can also reinforce social and political dimensions of the institutional systems – e.g. socio-political institutions create stable social worlds by complementary distributional and ideational elements.
Importantly both normative and cognitive institutions require complementarities as incoherent institutional influences would contradict themselves (Becker, 2007), but political and socio-cognitive complementarities do not enhance economic efficacy but in contrast may even challenge achieving it (North, 1990, p. 95).
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Lastly, sociological institutionalism argues that there are no universal reference frames (e.g. Friedland & Alford, 1991), but the interdependence of material, political and social dimensions of institutional system requires the institutional systems are dependent on material reality (Dunn & Jones, 2010; Waldorff, Reay & Goodrick, 2013; Haveman &
Rao, 1997; Greenwood et al., 2011). Lack of universal references frames cannot mean arbitrariness, and while social systems and institutions are often created for specific socio-political purposes, the social embeddedness and stability requires attaining at least certain level of material efficacy. Also, the example of organizations as strategic entities complying with social and political dimensions for the material gains effectively implies the different dimensions are deeply tangled, with material functionality as the underlying logic (Suchman, 1995; Friedland, 2009). New institutionalism, across the paradigms, generally perceive that material, political and ideational elements act together (e.g. Scott, 2008; DiMaggio & Powell, 1983; Aoki, 2007; North, 1990; Berger & Luckmann, 1966;
Bourdieu, 1977), but synthesizing work, despite of the potential benefits of novel innovative work (Thelen, 1999; Hall & Taylor, 1996), has not materialized.