INSTITUTIONALIST THEORIES of MARKETS

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INSTITUTIONALIST THEORIES of MARKETS
ORGANIZATIONS
Economic institutions are rules and regulations,
with enforcement mechanisms, that constrain
actors choices and behaviors. Actors that
conform to taken-for-granted norms, structures,
and practices of markets and organizations are
viewed as legitimate, receive public approval,
and access to a variety of resources.
TAKEN-FOR-GRANTED ASSUMPTIONS are beliefs held
without challenge that a homogeneous set of
desirable actions and structures should be
rewarded with financial resources, prestige, and
public esteem LEGITIMACY involves normative
beliefs by others about the proper, acceptable
exercise of institutional authority (
legitimate power)
Institutionalization evolves from informal norms
toward increasing rule codification, sanctioned
by regulatory bodies e.g., college accreditation.
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Old New Economic Institutionalisms
With Veblen, John Commons (1962-1945) Wesley
Mitchell (1874-1948) led Old Economic
Institutionalism, stressing legal origins,
evolutionary, habitual, voluntary processes in
the formation and change of institutions.
OEI proponents stressed historical, legal,
social, political, other institutional factors
on which economic laws are contingent. The
market is not immutable, rather economic
behaviors are conditioned by changing historical
influences, especially evolution of societal
institutions that shape an individual actors
beliefs and actions.
OEI was receptive to bringing the other social
sciences into economics to help understand the
origin and development of institutions. But by
1930s, once-dominant OEI was eclipsed in U.S. by
neoclassical Keynesian economics. In stark
contrast, New Economic Institutionalism relies on
neoclassical econ principles to show how
institutions result from individual actors
preferences, transaction costs, legal property
rights. Key NEI theorists include Ronald Coase,
Oliver Williamson, Douglass North, Armen Alchian,
Harold Demsetz.
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Everything Old is New Again
Contemporary economists reintroduced
traditional institutionalism by rejecting NIEs
reduction of institutions to preferences and
technologies. Tastes affect institutions, but
are also shaped and constrained by them.
Geoffrey Hodgson argued that to regard actors
only as rational utility-maximizers is either
inadequate or erroneous. Peoples preferences
dont simply create the institutions within which
they work and live their lives. Instead, by
various processes of reconstitutive downward
causation, institutions come to affect
individuals in fundamental ways.

• How did advertising and marketing institutions
  develop that shape consumer choices? (Are your
  decisions never affected by ads?)
• Do consumers have any influence on the
  advertising industry?
• What governmental private-sector institutions
  regulate advertisers claims about
  product/service safety and quality? How
  effectively?

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The Great Divide
Talcott Parsons (1902-79) foisted a theoretical
division of labor between economics sociology
allocation of means vs. ultimate value factor.
Both disciplines neglected to theorize
investigate economic institutions.
Parsons AGIL scheme of functional system
problems, with four subsystems specializing in
meeting a societys needs for Adaptation
acquire sufficient resources economy
businessGoal Attainment set and implement
goals politics governmentIntegration
maintain solidarity subunit coordination
courts, religions Latency create, preserve,
transmit culture values family, education

• In Economy Society (1956), Parsons Neil
  Smelser subsumed economic theory as a special
  case of the general theory of social systems
• Money, power, value, influence are four
  fundamental generalized media of exchange
• Apart from mediating purchases, money is also a
  cultural object with social meanings
• Markets and firms (core economic subsystem
  structures) follow utility-maximizing principles
  viewed as illegitimate for other subsystems
  families, churches, courts, ...
• Explaining how complex exchanges of these four
  symbolic media across the four AGIL subsystems
  can functionally integrate a society is a central
  theoretical task for sociology

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Institutions Redux
Only when economic sociology revived in the 1980s
was the study of economic institutions restored
to a theoretically central position.
Mark Granovetter (1985) had imperialist aims to
substitute social action theory for neoclassical
explanations of economic behavior 1. Economic
action is embedded in networks of social
relations 2. It is directed at pursuit of both
economic and noneconomic goals 3. Economic
institutions are socially constructed
How well has this agenda succeeded in creating
an elaborate conceptual apparatus to challenge
mainstream economics? How are noneconomic goals
such as sociability, approval, status, power
involved in pursuing economic goals?
Examples? Has sociological institutional theory
generated empirical work that better explains
economic behavior than does neoclassical utility
theory?
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3 Pillars of Sociological Institutions
Dick Scott defined institutions as multifaceted,
durable social structures, made up of symbolic
elements, social activities, and material
resources. They are relatively resistant to
change. His typology comprised 3 pillars
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Orgl Myths Ceremonies
Orgs mirror societal conventions, playing
lip-service to dominant values norms. A
loose-coupling occurs between orgl facades
operational cores, e.g., bureaucratic schools
wherein classroom anarchy prevails.
Organizational field members develop shared
meaning systems, a consensus about desired
qualities, values, and behaviors.
Institutionalizing common understandings requires
that social processes, obligations, or
actualities come to take on a rule-like status in
social thought and action (John Meyer Brian
Rowan 1977341). Symbolic meanings are embedded
into formal structures and routine practices
permeating everyday orgl life.
Institutionalized routines often exhibit faddish,
ritualistic, ceremonial mythic elements largely
unrelated to rational efficiency or effectiveness
(DMV red tape, UM cap-and-gown rites).
Organizational structures and practices persist
as traditional customs and habits, regardless of
their rationality, but simply because plausible
alternatives to traditions grow unthinkable. In
other words, institutionalized acts are done for
no other reason than that is how things are done
(Pfeffer 1982240).
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Mechanisms of Isomorphism
Citation classic by Paul DiMaggio Woody Powell
(1983) proposed three mechanisms generating
isomorphic conformity (convergence around a
single form), thereby reducing variation within
industries orgl fields.
Coercive isomorphism stems from political
influences and cultural expectations Mimesis
arises in uncertainties leading to imitation of
apparently successful forms   Normative
pressures originate in occupational communities
professional assns
Causal ambiguities about orgl performance
especially in government nonprofit sectors, but
even in business promote a slavish mimicry in
the diffusion adoption of the hottest
management fads fashions Taylorism, M-form,
Human Relations, Matrix, Theory Z, TQM, ISO, BPR,
etc. ad nauseum.
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Institutionalized Market Hazards
Wayne Baker colleagues modeled markets as
intertemporal processes which integrate theories
of competition, power, and institutional forces.
EHA market ties of 1,644 advertising agencies
clients found informal exchange rules
institutionalized in emergence of the ad-services
market exclusivity (sole-source) and loyalty
(infrequent agency switching). Altho most
institutional forces reduce the risk of breaking
agency-client ties, competition increases it.
Powerful agencies mobilize resources to increase
tie stability, but powerful clients mobilize
resources to increase or decrease stability.
This market is imperfectly institutionalized as
repeated patterns of exchange, because
competition and changing norms about the duration
of market ties destabilize market relationships.

• An illegal price-fixing cartel in the U.S.
  electrical industry relied on the social
  structure of committee meetings to ameliorate its
  members competitive difficulties in the market
• Cartel continuity was responsive to market
  conditions that favored a cartels formation.
• Centralization of the cartels authority in
  decision making resulted in more effective
  collusive pricing.

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Stock Market as Institution
Stock financial markets are social
institutions, not just efficient arenas to raise
capital and set share prices by supply--demand
exchanges.
nearly all sociological research on money,
financial markets, and banking at least
implicitly assumes that financial relations are
social relations. ... Rather it suggests that
sociologists can (and do) usefully inform studies
of a subject most often associated with another
discipline. They usefully extend knowledge
about social interaction developed in other
subfields of the discipline to improve
understanding of banking and finance. (Lisa
Keister 200253)
Analysts should try to identify the conditions
where the institutional rules of a financial
market are followed, not followed, transgressed,
or transformed. H When uncertainty is high,
actors deal with trusted past partners to avoid
malfeasance and opportunism H They access
partners networks to obtain reliable information
about potential partner trustworthiness
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Stock Market as Social Construction
Institutionalists depict stock market behaviors
as socially constructed, in contrast to
mainstream economics view of markets efficient
rationality.
Zajac Westphal (2004) suggested that market
reactions to stock repurchase plans were
influenced by the mid-1980s U.S. emergence of the
agency perspective on corporate governance. This
powerful new institutional logic led the market
to reverse its prior negative reaction to
repurchase plans. They proposed competing
hypotheses about how the market value of these
policies might have increased as more firms
formally adopted, but did not implement, the
stock repurchase plans over time.
Zajac Westphal posited that institutionalization
processes could increase the collective
appraisal of the policys market value as more
and more firms adopt it (mimesis), despite the
growing evidence of insitutionalized decoupling.
In contrast, neoclassical economics predicts that
markets should discount a policys value when
evidence accumulates of nonimplementation. Ezra
Zuckerman (2004) criticized ZWs quick dismissal
of orthodox economic explanations. Sociologists
would do well to consider and incorporate in
some way the economists intuitions into the
social construction of financial markets.
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Discussion Quex

1. Can Hodgsons four defining characteristics of
   institutional economics distinguish OEI from NEI?
   Where does the new sociological institutionalism
   fit into this picture?
2. Give some examples of reconstitutive downward
   causation from institutions to individuals
   also the reverse causal direction.
3. How do we explain this lack of co-operation
   (Velthuis) between new economic sociology and
   institutional economics? Was Talcott Parsons
   really to blame?
4. What would you propose as an appropriate division
   of academic labor between sociology economics?
5. How useful is Ingram Clays 2x2 classification
   of institutional forms (public/private,
   centralized/decentralized) for theorizing about
   choice-within-constraints? How can we go about
   building a better theory about private
   decentralized institutions?
6. Many critics fault institutionalism for its
   static, conservative biases. What elements
   should be included in a theory of institutional
   change and evolution?
7. How could Granovetters imperialistic ambitions
   (hubris?) best be achieved to replace the
   neoclassical economic explanation with an
   alternative socially constructed framework for
   understanding economic actions?

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References
Baker, Wayne E., Robert R Faulkner and Gene A.
Fisher. 1998. Hazards of the Market The
Continuity and Dissolution of Interorganizational
Market Relationships. American Sociological
Review 63147-177. DiMaggio, Paul and Walter
Powell. 1983. The Iron Cage Revisited
Institutional Isomorphism and Collective
Rationality in Organizational Fields. American
Sociological Review 48147-160. Faulkner, Robert
R., Eric R. Cheney, Gene A. Fisher and Wayne E.
Baker. 2002. Crime by Committee Conspirators
and Company Men in the Illegal Electrical
Industry Cartel, 1954-1959. Criminology
41511-554. Keister, Lisa. 2002. Financial
Markets, Money, and Banking. Annual Review of
Sociology 2839-61. Meyer, John W. and Brian
Rowan. 1977. Institutionalized Organizations
Formal Structure as Myth and Ceremony. American
Journal of Sociology 83340-363. Scott, W.
Richard. 2001. Institutions and Organizations,
Second Edition. Thousand Oaks, CA Sage
Publications. Zajac, Edward J. and James D.
Westphal. 2004. Should Sociological Theories
Venture into Economic Territory? Yes! American
Sociological Review 69(3)466-471. Zajac, Edward
J. and James D. Westphal. 2004. The Social
Construction of Market Value Institutionalization
and Learning Perspectives on Stock Market
Reactions. American Sociological Review
69433-457. Zuckerman, Ezra W. 2004. 2004.
Towards the Social Reconstruction of an
Interdisciplinary Turf War. American
Sociological Review 69458-465.