The World's Richest Municipality: The Importance of Institutions for Municipal Development

By Brorstrom, Bjorn | Journal of Economic Issues, March 2002 | Go to article overview

The World's Richest Municipality: The Importance of Institutions for Municipal Development


Brorstrom, Bjorn, Journal of Economic Issues


Success, Institutions, and Institutional Change

Success in Brief

Organizations with the capability to handle uncertainty are those which best solve problems and stay successful for longer periods of time. This assertion is strongly supported in several important works of research in the field of social sciences (see, e.g., Olson 1984, North 1990, and Ostrom 1990). Each organization has at its disposal a set of methods and techniques, and the purpose of applying them in the implementation of activities is to contribute to the reduction of uncertainty. Factors such as good leadership, a well-adapted form of organization, satisfactory rendering of information, and reliable data for decision making bring reduction of uncertainty. Hence, the goal is to use suitable methods and techniques and apply them in such a way that they serve the purpose of the organization and its performers as well as the activities carried on.

However, current knowledge regarding which solutions are best suited to handle uncertainty is insufficient. After all, uncertainty means that there is a lack of knowledge about the circumstances under which the chosen solution should be applied, and this, in turn, means that the solution selected and applied may not be at all suited for the organization's particular problem. From such a way of looking at the meaning of uncertainty, the economist and social philosopher Friedrich August von Hayek (1960) asserted, in the spirit of Joseph A. Schumpeter, that the society which best solves its problems over time is the society that allows for the highest number of trials. Historians Nathan Rosenberg and L. E. Birdzell Jr. (1991) came to a similar conclusion following their attempt to explain the West's road to success. Their conclusion is that the ability of renewal explains growth and that renewal occurs where the implementation of experiments is facilitated (see also Rosenberg 1994). Another perspective of the me aning of uncertainty and how it should be handled was given by the economists and critical institutionalists Philip Klein and Edythe Miller (1996), who illustrated the importance of flexibility for the adoption of new ideas and technological change. Flexibility presupposes a large dissemination of power and resources within the organization. It is assumed that a decentralized structure creates opportunities for the flexibility needed, since such a structure makes the best use of people's abilities in relation to other balances struck between the central and local levels. Hayek, Rosenberg, Birdzell, Klein, and Miller represent different fundamental outlooks on social progress, but all emphasize the significance of renewal for the organization's successful handling of uncertainty.

A central form of argument in the analyses of social progress made by economic historian, neo-classicist and Nobel laureate Douglass North deals with the importance of maintaining adaptive efficiency, which involves an organization's ability to adapt its activities to altered conditions.

[T]he overall institutional structure plays the key role in the degree that the society and the economy will encourage the trials, experiments, and innovations that we can characterize as adaptively efficient. The incentives embedded in the institutional framework direct the process of learning by doing and the development of tacit knowledge that will lead individuals in decision-making processes to evolve systems gradually that are different from the ones that they had to begin with. (1990, 81)

Adaptive efficiency is the key to long-term success (North 1990; North and Thomas 1993) and may or may not be supported by allocative efficiency, which concerns the organization's ability to allocate its resources in a way that brings high cost-effectiveness. The case might even be that the current organizations and activities are secured if conditions are created for allocative efficiency to take place, but this could happen at the expense of what Schumpeter (1934) termed the process of creative destruction. …

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