A Framework for the Analysis of Stability and Change in Formal Institutions
Redmond, William H., Journal of Economic Issues
Formal institutions play a central role in many spheres of life and are consequential in both economic activity and public policy. Despite the early example of John R. Commons, formal institutions have received limited explicit treatment in the original institutional economics literature. Few articles today in the Journal of Economic Issues treat formal institutions; few authors of books or edited volumes treat formal institutions. Exceptions to this rule tend to briefly note differences between formal and informal and quickly move on to other topics (e.g., Gordon 1980).
Apart from original institutionalists, other economists recognize the salience of formal institutions and give them explicit treatment; for instance, Douglass North (1990) includes an entire chapter on formal institutions in Institutions, Institutional Change, and Economic Performance. However, these treatments are consonant with rational choice assumptions of human behavior or variants thereof, such as the new institutional economics (Vandenberg 2002). The purpose of the present paper is to articulate a framework for formal institutions which proceeds from assumptions compatible with the original institutional economics.
Institutions serve to constrain and guide human behavior. More particularly, institutions are systems of established and embedded social rules that structure social interactions (Hodgson 2001). (1) Both formal and informal institutions share this property. Informal institutions include such things as norms, conventions, customs, and traditions; formal institutions include such things as laws, religious organizations, stock markets, and universities. Formality is a somewhat elusive concept with a variety of meanings and interpretations. The Oxford English Dictionary (2d ed.) gives twenty-three senses of the adjective formal, one of which (#5) seems to best apply to the present case:
Done or made with the forms recognized as ensuring validity; explicit and definite, as opposed to what is matter of tacit understanding.
Following this, formal institutions are institutions characterized by purposeful attention to validity as well as explicitness with respect to rules and consequences. These characteristics are expressed in a number of tangible ways, such as charters, proclamations, bylaws, symbols, and a variety of ceremonial displays and rituals.
However familiar and tangible, these and other characteristics fail to represent the essence of the distinction between formal and informal. Instead, they are best viewed as the accoutrements of formality, albeit highly useful ones. The basis of fundamental differences between formal and informal institutions lies in the concentration of control over the institution. Informal institutions are embodied in and across group members, with a substantial degree of egalitarianism. Each member is somewhat of a personal authority, and each may exercise some measure of latitude to interpret the institution, to encourage conformity, and to punish violations. On the other hand, formal institutions are much less egalitarian: authority rests with a specially designated subgroup. Formal institutions are administered by a central authority. Thus the essential difference is a difference in locus and type of control. A formal institution is one in which control of the institution has been expropriated by, or otherwise vested in, an elite. This type of institutional control involves the power of the few to set rules which will direct the behavior of the many, as well as the power to interpret and enforce the rules. By contrast an informal institution is one in which control is distributed among group members, although some individuals will usually have more influence than others. This type of institutional control is communal and emergent rather than an exercise of power.
Maintenance of control in formal institutions occasions the use of tangible characteristics such as explicitness of rules and attention to forms which ensure validity, viz. …