Institutions, Organizations, and Interests

John WallisUniversity of Maryland and NBER

North

• Institutions are the rules of the game , organizations are the teams.

• Organizations must decide whether to cheat, follow the rules, and/or devote resources to changing the rules

• The implicit assumption is that the rules apply equally to all organizations.

Greif

• Institutions are made up of elements:• Formal rules, norms, organizations, and

beliefs.• The elements of stable institutions interact in

a way that creates beliefs sustained by actual behavior under the rules.

Organizations

• In North, organizations are the players that change institutions, but their behavior is fundamentally constrained by the rules.

• In Greif, organizations drop out of explicit consideration and the focus is on how individuals and their beliefs interact with rules and norms.

This Paper

• Following ideas laid out in North, Wallis, and Weingast, Violence and Social Orders,

• Are there social arrangements where the rules are constrained by the needs of organizations, rather than organizations being constrained by the rules?

• What individual interests sustain these social orders?

Interests

• Preferences• Casual Beliefs• Choice sets (in part a function of institutional

rules and arrangements)• Relative prices – the relationship between

element in the choice sets.

• Note that organizations do not appear here.

Greif and Interests

• Avner’s framework is a way to set individual interests in a complex set of social arrangements where each individual acts in his or her “interests” and a sustainable social outcome is realized.

• What follows is very Greifian, if you will.

Organizations and interests

• Greifian institutions are encompassing organizations: they are self-contained, self-sustaining internally consistent forms of human interaction.

• But there are pieces of every institution that are not self-enforcing, that rely on third-party services from some other part of the institution.

• The medieval church, pope, and the bishops is an example.

NWW and the Natural State

• We can think about two types of organizations:

• Adherent organizations are held together only by the internal arrangements and interests of the members.

• Contractual organization utilize third-party arrangements external to the organization to order internal arrangements.

A B

x

x

x

x

x

x

Adherent Organization

Contractual Contractual

• In a “natural state,” the adherent organization of the dominant coalition is stable because of the rents generated by the limited availability of support for contractual organizations.

• The contractual organizations are more productive because of third-party support .

• Both the adherent and contractual organizations shape the interests of their members.

Organizations and rules

• This is a world in which the rules differ for all of the organizations.

• Within the dominant coalition, organizations shape the rules, rather than the other way around.

• This is not the Northian notion of rules constraining the teams.

Manipulation of Interests

• In natural states, interests are manipulated.• They way they are manipulated in a society

wide sense is not intentional, the complex of social interaction is too complicated.

• But access to organizational forms, the ability to form a contractual organization is intentional.

Politics and economics• In Avner’s framework the distinction between

an adherent and a contractual organization is not very important, because the focus is on the entire institution.

• But in complex societies, particularly in the rise of open access societies which do not limit access to organizational forms, the distinction is critical.

• It is a distinction in which the state comes to play a much more important role.

Democratic Institutions and Natural States

• Putting democratic electoral institutions into a natural state will not change the fundamental nature of interests.

• Interests will still be shaped by organizations.

A B

x

x

x

x

x

x

Adherent Organization

Contractual Contractual

• Elections may change the internal dynamics of the dominant coalition,

• But the society still manipulates interests and the institution of elections does not create outcomes where the interests of the people are reflected in the decisions of the government.

A B

x

x

x

x

x

x

Adherent Organization

Contractual Contractual

Open Access

• In an open access society, access to contractual organizations can allow interests to form independent of the needs of the dominant coalition.

• An open access society does not manipulate interests

• Open access can only be guaranteed by “rules” that apply impersonally to all individuals.

• By now I am probably out of time.• In Avner’s sense, an open access society only

works as an institutional equilibrium if people believe that rules are more important than organizations.

• That is, that they believe that their interests are best served by sustaining rules even if it costs them something in terms of the interests of the organizations they belong to.

• In a natural state, it is not so much that people believe that enforcement of the rules is not credible,

• It is that people believe that organizations are credible and it is in their interest to support organizations.

• Bush v. Gore• Kenya, Zimbabwe, and Bangladesh

United States History

• First requirement is that rules regarding organization are the same for all citizens

Indiana 1851

Iowa 1857 1846

Nevada 1864

Maryland 1864 1851

Florida 1868 1839 1869

Texas 1869

Illinois 1870 1848 1872

West Virginia 1872

New York 1874 1846

Pennsylvania 1874

New Jersey 1875 1844

Colorado 1876

Louisiana 1879 1879 1845

California 1879 1849

Table 2Date When States Adopts General Framework for Laws

United States History

• First requirement is that rules are the same for all citizens

• Second requirement is that access to organizational forms is available to all citizens.

States That Wrote New ConstitutionsOr Amended Constitutions between 1842 and 1852,And whether the changes affected Debt, Corporations, and Taxation.

Rhode Island 1842 Y Y Y

New Jersey 1844 Y Y Y

Louisiana 1845 Y Y Y

1851 Y Y Y

New York 1846 Y Y

Illinois 1848 Y Y Y

Kentucky 1850 Y Y

Michigan 1850 Y Y Y

Virginia 1850 Y

Indiana 1851 Y Y Y

Maryland 1851 Y Y Y

Ohio 1851 Y Y Y

General Laws for Cities

• New York 1846• Wisconsin 1848• Illinois 1848• California 1849• Ohio 1851• Kansas 1859• Maryland 1864• …• …

• Rule of law, unbiased enforcement of existing rules for all citizens is a feature of modern open access societies that requires open access to economic organizations to sustain political competition.

• American history shows a steady institutionalization of rules that embody those priniciples.