OLD AND NEW INSTITUTIONAL ECONOMICS: INSTITUTIONAL SYSTEMS AND SOCIAL ORDER

How is social order possible? We shall focus on whole systems of rules and the order that such systems can help to create. We shall also offer a contemporary analysis to the question of social order by investigating associations.

A system is defined as a configuration of multiple elements or characteristics. Complex systems are hard to plan and operate. Many of them are self-organising and self-regulating. Complex systems are evolving and open, in that their elements are changing in unpredictable directions. Spontaneous variations of elements occur; elements appear, mutate and disappear. These are tested and selected or rejected and feedback ensures that the system is stabilised. A system of rule may be ordered by experience and evolutionary learning (spontaneous) or by design, socially constructed (planned).

Hierarchy of external institutions is a system of in which status and authority are ranked, with higher ranks having the right to command and order the lower ranks. Natural law is based on the affirmation that human beings have certain inalienable rights. Natural law recognises that all humans are equal in certain fundamental respects. It is the source if certain basic (negative) liberties (freedoms from interference by authorities and fellow humans).

Order means that repetitive events or actions fit into a discernible pattern that allows people to have confidence that the pattern of future actions can be predicted reasonably well. If the world is ordered, complexity, and hence the knowledge problem, is reduced and economic agents are better able to specialise. Institutions serve to facilitate the emergence of order.

The institutional system should have evolutionary capacity. Meta-rules provide a framework that confines what changes can be made and how these changes will be decided. It is not easy to keep complex institutional systems internally compatible and cohesive. Simplifying and streamlining institutions and adopting simple and general rules can foster greater effectiveness.

It is popular to distinguish social ordering of human actions into two ways:

• directed by an outside authority that plans and implements order by instructions or directives to achieve a joint (organised, planned or designed order);
• social ordering (e.g. markets) arises indirectly as predictable patterns emerge independently of the purposive will of actors, but rather as an unintended consequence of individual human actions (spontaneous or unplanned order).

While designed orders can be advantageous (ex-ante plans for the ‘good life’), there are limits to them, as cooperation of human action within them places great demands:

• on the availability of knowledge and the gathering of information (constructivism);
• authorities’ capacity to interpret and communicate such information;
• authorities’ capacity to motivate and monitor agents;

Organised orders have been criticised for producing unintentional and undesirable consequences, and being slow to change and adapt to new circumstances.

The spontaneous order of the market process (ex-post order) has given valuable answers to the following questions:

• How are individuals to search for and procure knowledge useful for their purposes?
• How is this knowledge to be disseminated?
• How are errors corrected so as that the system is not destabilised?

The market system does this spontaneously through the price signals that emerge in competitive processes. This process is referred to as the discovery procedures, and sometimes called catallaxy. However, there are limits to the market order: inequalities of outcomes and anarchic and irrational coordination.

Preferences for how to order social and economic life have much to do with fundamental philosophy to individualism (humans are self-interested, autonomous and equal individuals with limited cognitive powers and knowledge; society is a web of essentially voluntary interactions).

Both of these coordination devices require different value systems, attitudes and modes of behaviour.

• The guardian syndrome: planned orders always presuppose a degree of hierarchy and the use of compulsion. This covers a set of norms such as sharing, loyal obedience to authority and tradition, exclusivity and defence of honour.
• The commercial syndrome: spontaneous orders emerge among equals who act voluntarily. This covers a set of virtues such as rejection of force, openness of exchange, collaboration with strangers and thrift.

Following from the previous section, these two popular perceptions of society (individualism and collectivism) have affected how we conduct public policy.

• Individualists prefer voluntary exchanges within a framework of rules, rely on proscriptive rules and negative liberties, and aim for an open, evolving society. Under individualism, policy makers advocate individual responsibility and initiative- and risk-taking, and support basic infrastructure.
• Collectivists prefer central planning and directives, rely on prescriptions and compulsion, and aim for controlled society. Under collectivism, policy makers emphasise the need for welfare assistance and the provision of public goods.

Traditionally, the answer to ‘How is social order possible?’ involved three ideal types and their guiding principles in the social science thought (the first is usually ignored, and the other two are quite popular and much is written on them):

• the community, or its principle of spontaneous solidarity;
• the market, or its logic of dispersed competition;
• the state, or its principle of hierarchical control.

In reality, modern economies can be analysed in terms of the some mix of them.

Yet, there is an additional, distinctive institutional basis of order:

• the association, its logic of organisational negotiation.

We shall examine the corporative-associative model’s distinctive principle of interaction and its properties. The key actors are organisations (such as large capitalists, large trade unions, doctors) defined by their common purpose of defending and promoting their defined interests (i.e. class, sectoral and professional). The central principle is that of negotiation within and among a limited and fixed set of interest organisations that recognise each other’s status and entitlement, and are capable of reaching and implementing relatively stable compromises in the pursuit of their interests.

The enabling conditions of the corporative-associative model is distinct from the other types of social order. In a community order, actors’ preferences and choices are interdependent based on shared norms and jointly produced satisfaction. In a market order, the actions of competitors are independent, as no actors can dominate in a competitive and dynamic economy. In a state order, the actors are dependent upon hierarchical coordination based on the structure of legitimate authority and coercive capability. In a corporative-associative order, actors are strategically interdependent in the sense that actions of organised collectivities can satisfy their own interests, and this induces them to search for relatively stable pacts (compromises).

The medium of the associative model consists of predominately of mutual recognition of status and entitlements. Associative groups make demands on each other and offer in return for the satisfaction of these interests to deliver the compliance if their members. For instance, during the post-1945 period, capitalists, trade unions and the state negotiated a social pact: offering high wages to workers, industrial peace to capitalists and political stability to politicians. This period was referred to as ‘Fordism’.

Communities decide by unanimous consent, markets by consumer or majority preference, states by authoritative adjudication and imperatives. Corporative associations decode by highly complicated formulae that start with parity representation, work through a process of proportional adjustments, and then ratify the final pact by concurrent consent. All this takes time and is vulnerable to assaults from many directions.

The final structural element is its lines of tensions and conflicts. Associational leaders find themselves in conflict with their members on the one side and their partners on the other. Opportunistic capitalists, radically mobilised workers, outraged voters, and offended civil servants may not be contained by associational compromises.

Corporative associations seem to capable of solving a number of problems that have been found in other types of social order. The state has two deficiencies: the limits of legal regulation, especially in terms of implementation; and difficulties of legitimation. The notion of collective responsibility of interest associations serves to discipline and monitor, and legitimate actions. The market fails to produce collective goods and results in social inequalities and divisions. The corporative associations can provide for collective goods and avoid conflicts. The community lacks authoritative means to mobilise resources. The associations can overcome this by appealing to group-specific values and interests. In reality, all four types of social order operate, at times complementing each other.