The New Institutionalism in Organizational Analysisby Walter W. Powell
In their introduction, the
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Long a fruitful area of scrutiny for students of organizations, the study of institutions is undergoing a renaissance in contemporary social science. This volume offers, for the first time, both often-cited foundation works and the latest writings of scholars associated with the "institutional" approach to organization analysis.
In their introduction, the editors discuss points of convergence and disagreement with institutionally oriented research in economics and political science, and locate the "institutional" approach in relation to major developments in contemporary sociological theory. Several chapters consolidate the theoretical advances of the past decade, identify and clarify the paradigm's key ambiguities, and push the theoretical agenda in novel ways by developing sophisticated arguments about the linkage between institutional patterns and forms of social structure. The empirical studies that follow—involving such diverse topics as mental health clinics, art museums, large corporations, civil-service systems, and national polities—illustrate the explanatory power of institutional theory in the analysis of organizational change.
Required reading for anyone interested in the sociology of organizations, the volume should appeal to scholars concerned with culture, political institutions, and social change.
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The New Institutionalism in Organizational Analysis
By Walter W. Powell, Paul J. DiMaggio
The University of Chicago PressCopyright © 1991 The University of Chicago
All rights reserved.
PAUL J. DIMAGGIO AND WALTER W. POWELL
Institutional theory presents a paradox. Institutional analysis is as old as Emile Durkheim's exhortation to study "social facts as things," yet sufficiently novel to be preceded by new in much of the contemporary literature. Institutionalism purportedly represents a distinctive approach to the study of social, economic, and political phenomena; yet it is often easier to gain agreement about what it is not than about what it is. There are several reasons for this ambiguity: scholars who have written about institutions have often been rather casual about defining them; institutionalism has disparate meanings in different disciplines; and, even within organization theory, "institutionalists" vary in their relative emphasis on micro and macro features, in their weightings of cognitive and normative aspects of institutions, and in the importance they attribute to interests and relational networks in the creation and diffusion of institutions.
Although there are as many "new institutionalisms" as there are social science disciplines, this book is about just one of them, the one that has made its mark on organization theory, especially that branch most closely associated with sociology. In presenting the papers assembled here, we hope to accomplish three things. First, by publishing together for the first time (in part 1) four often-cited foundation works, we provide a convenient opening for readers seeking an introduction to this literature. Second, the papers that follow (especially those in part 2) advance institutionalism's theoretical cutting edge by clarifying ambiguities in the paradigm and defining the processes through which institutions shape organizational structure and action. These papers consolidate the work of the last decade and suggest several agendas for further investigation.
Third, the empirical contributions in part 3 illustrate the explanatory potential of institutional theory in an area in which it has been relatively silent: the analysis of organizational change. Two of these chapters (DiMaggio; Galaskiewicz) analyze the emergence of organizational fields; two (Fligstein; Brint and Karabel) explain significant transformations within existing fields; and the last two chapters (Orrù, Biggart, and Hamilton; Singh, Tucker, and Meinhard) explore the relationship between institutional processes and interorganizational competition.
Together, then, the contributions to this volume represent the new institutionalism's origins, its present, and its future. They set out fundamental ideas, define and clarify distinctive analytic frameworks, and explores themes of change, conflict, and competition that bring institutional analysis into closer contact with the concerns of organization studies and contemporary social theory.
This introduction provides a context for the papers that follow. We present neither an overview nor a critique of the new institutionalism in organization theory, nor do we offer a research agenda. The contributions to this book do those jobs very ably. What we shall do, in the following sections, is locate the "neoinstitutional" organization theory presented here, first, among the several contemporary institutionalisms, especially those of economics and political science, and, second, within the disciplines of sociology and organization studies, both with reference to the "old" institutionalism and to independent but convergent developments in sociological theory. We close this introduction with a discussion of several key open questions in institutional analysis and show how chapters in this volume speak to these issues.
The "New Institutionalism" in Disciplinary Context
The study of institutions is experiencing a renaissance throughout the social sciences. In some quarters, this development is a reaction against the behavioral revolution of recent decades, which interpreted collective political and economic behavior as the aggregate consequence of individual choice. Behavioralists viewed institutions as epiphenomenal, merely the sum of individual-level properties. But their neglect of social context and the durability of social institutions came at a high cost, especially in a world in which "social, political, and economic institutions have become larger, considerably more complex and resourceful, and prima facie more important to collective life" (March and Olsen 1984:734).
The resurgence of interest in institutions also harkens back to an older tradition of political economy, associated with Veblen and Commons, that focused on the mechanisms through which social and economic action occurred; and to the efforts of functionalists like Parsons and Selznick to grasp the enduring interconnections between the polity, the economy, and the society. These older lineages fell into disfavor not because they asked the wrong questions, but because they provided answers that were either largely descriptive and historically specific or so abstract as to lack explanatory punch. The current effort to conjoin the research foci of these traditions with contemporary developments in theory and method is not merely a return to scholarly roots, but an attempt to provide fresh answers to old questions about how social choices are shaped, mediated, and channeled by institutional arrangements.
A different strand of institutional thinking comes from such fields as macrosociology, social history, and cultural studies, in which behavioralism never took hold. In these areas, institutions have always been regarded as the basic building blocks of social and political life. New insights from anthropology, history, and continental social theory challenge deterministic varieties of both functionalism and individualism, shedding light on how meaning is socially constructed and how symbolic action transforms notions of agency. This line of thinking suggests that individual preferences and such basic categories of thought as the self, social action, the state, and citizenship are shaped by institutional forces.
Within organizational studies, institutional theory has responded to empirical anomalies, to the fact that, as March and Olsen (1984:747) put it, "what we observe in the world is inconsistent with the ways in which contemporary theories ask us to talk." Studies of organizational and political change routinely point to findings that are hard to square with either rational-actor or functionalist accounts (see DiMaggio and Powell, ch. 3). Administrators and politicians champion programs that are established but not implemented; managers gather information assiduously, but fail to analyze it; experts are hired not for advice but to signal legitimacy. Such pervasive findings of case-based research provoke efforts to replace rational theories of technical contingency or strategic choice with alternative models that are more consistent with the organizational reality that researchers have observed.
Approaches to institutions rooted in such different soils cannot be expected to converge on a single set of assumptions and goals. There are, in fact, many new institutionalisms—in economics, organization theory, political science and public choice, history, and sociology—united by little but a common skepticism toward atomistic accounts of social processes and a common conviction that institutional arrangements and social processes matter. In this brief review, we focus only on a few of the major tendencies and contrast them with the "new institutionalism" in organizational analysis.
THE NEW INSTITUTIONAL ECONOMICS
The analytic tradition initiated by Coase (1937, 1960) and reinvigorated by Williamson (1975, 1985) has been taken up by economic historians (North 1981), students of law and economics (Posner 1981), game theorists (Schotter 1981), and organizational economists (Alchian and Demsetz 1972; Nelson and Winter 1982; Grossman and Hart 1987).
The new institutional economics adds a healthy dose of realism to the standard assumptions of microeconomic theory. Individuals attempt to maximize their behavior over stable and consistent preference orderings, but they do so, institutional economists argue, in the face of cognitive limits, incomplete information, and difficulties in monitoring and enforcing agreements. Institutions arise and persist when they confer benefits greater than the transaction cots (that is, the costs of negotiation, execution, and enforcement) incurred in creating and sustaining them.
The new institutional economics takes the transaction as the primary unit of analysis. The parties to an exchange wish to economize on transaction costs in a world in which information is costly, some people behave opportunistically, and rationality is bounded. The challenge, then, is to understand how such attributes of transactions as asset specificity, uncertainty, and frequency give rise to specific kinds of economic institutions. According to organizational economists, institutions reduce uncertainty by providing dependable and efficient frameworks for economic exchange (North 1988).
Despite these shared assumptions there are points of divergence even within the new institutional economics. In particular, there are differences in treatments of transaction costs, contention over the optimality of institutions, and differential explanatory weight given to the state and ideology. Williamson (1985) sees opportunism (self-interest-seeking with guile) as a key source of transaction costs. By contrast, Matthews (1986) emphasizes the purely cognitive costs of organizing and monitoring transactions, even when participants are honest. North (1984) also defines transaction costs more broadly, viewing them as the general overhead costs of maintaining a system of property rights, under conditions of growing specialization and a complex division of labor.
Another unresolved issue concerns the extent to which institutions represent optimal responses to social needs. Throughout much of this literature there is, to use Kuran's (1988:144) term, an air of "optimistic functionalism, a mode of explanation whereby outcomes are attributed to their beneficial consequences." Williamson (1985), for example, implies that considerable foresight is exercised in the development of institutional arrangements and that competition eliminates institutions that have become inefficient. By contrast, Akerlof (1976) demonstrates that institutions may persist even when they serve no one's interests. For example, although everyone may be worse off under a caste system, rational individuals may comply with its norms because they do not want to risk ostracism. In other words, once institutions are established, they may persist even though they are collectively suboptimal (Zucker 1986).
Nelson and Winter (1982), who take an evolutionary approach, view institutions as end products of random variation, selection, and retention, rather than individual foresight. North (1988) argues that institutions are shaped by historical factors that limit the range of options open to decision makers; thus they produce different results than those implied by a theory of unlimited choices and strategic responses. Matthews (1986) argues that inertia plays an important role in institutional persistence. Even when institutions do not conform to the demands of a given environment, they may nevertheless endure because, as North suggests, the prospective gains from altering them are outweighed by the costs of making the changes. Thus, for North and others, the transaction costs of institutional change provide institutions with something of a cushion.
North is one of the few economists to attend to the importance of ideology and the state in maintaining institutions. As exchanges among individuals grow more specialized and complex, contracts require third-party enforcement, a demand that is met by political institutions, which play a positive role in specifying and enforcing property rights. But states vary greatly in the ways they define property rights, and citizens may view political institutions as more or less legitimate, depending on their ideologies. When ideological consensus is high, opportunistic behavior is curbed. When it is low, contracting costs are higher and more energy is expended on efforts at institutional change. Thus ideological consensus represents an efficient substitute for formal rules.
THE POSITIVE THEORY OF INSTITUTIONS
A new institutionalism has emerged in the field of politics in reaction to earlier conceptions of political behavior that were atomistic not only in their view of action as the product of goal-oriented, rational individuals (a position many "positive theorists" still share) but in an abstract, asocial conception of the contexts in which these goals are pursued. One strand of political science institutionalism (positive theory) focuses on domestic political institutions; another (regime theory) deals with international relations.
The positive theory of institutions is concerned with political decision making, especially the ways in which political structures (or institutions) shape political outcomes (Shepsle 1986). Atomistic versions of social-choice theory, to which this work responds, predicted unstable and paradoxical decisions under majority voting rules. Yet political life is not in constant flux; indeed, the key feature of U.S. politics is its pervasive stability (Moe 1987). What, then, accounts for this stability? The answer given by institutionalists in political science is that much of the instability inherent in pure majority voting systems is eliminated by legislative rules.
This approach complements the new institutional economics in its effort to link actor interests to political outcomes. The institutional arrangements that structure U.S. politics are viewed as responses to collective action problems, which arise precisely because the transaction costs of political exchange are high. Shepsle describes political institutions as "ex ante agreements about a structure of cooperation" that "economize on transaction costs, reduce opportunism and other forms of agency 'slippage,' and thereby enhance the prospects of gains through cooperation" (1986:74). Political institutions thus create stability in political life.
Most of the positive theorists' research deals with the relatively fixed structural features of the U.S. Congress—the agenda powers of congressional committees, and the rules that define legislative procedures and committee jurisdictions (Riker 1980; Shepsle and Weingast 1981, 1987; Weingast and Marshall 1988). The public-choice models that inform this work give special prominence to the mechanics of legislating, for example, the distribution of agenda-setting powers, the sequence in which proposals must be made, and the allocation of veto rights (Shepsle and Weingast 1987; Ostrom 1986; Shepsle 1986, 1988). Modeling in this tradition often employs principal-agent imagery to examine the efforts of one political actor (e.g., a congressional subcommittee) to control another (e.g., a federal agency).
The general picture provided by this insightful line of work is one in which congressional policy is highly dependent on the agenda-setting powers inherent in legislative rules. The explanation of the powerful gatekeeping role played by legislative committees "resides in the rules governing the sequence of proposing, amending, and especially of vetoing the legislative process" (Shepsle and Weingast 1987:86). The structure of political rules is fairly resilient to the ebbs and flows of the agendas of politicians, and the rules can easily live on when the original support for them wanes. As a result, legislative rules are seen as robust, resistant in the short run to political pressures, and in the long run, systematically constraining the options decision makers are free to pursue.
Political scientist Terry Moe has chided rational-choice institutionalism for emphasizing the formal mechanisms of legislative control to the exclusion of indirect, unintentional, and systemic methods (Moe 1987:291). Missing from the positive theory's models of rules and procedures are the dynamic, informal features of institutions. In an insightful analytic history of the National Labor Relations Board, Moe demonstrates how the agency transformed its own political environment, and highlights the vital mutual dependence that developed between the NLRB and its constituents. He also emphasizes the role of informal norms and standards of professionalism in shaping the board's relationship with Congress. Nevertheless, Moe concludes that, despite its flaws, the new institutionalism in politics and economics promises to provide a general rational-choice theory of social institutions. We are somewhat less optimistic, in part because Moe's excellent work demonstrates that this approach focuses on only the more formal and fixed aspects of the political process. While some concern is evinced for how institutions emerge, most of the analyses treat rules and procedures as exogenous determinants of political behavior.
Excerpted from The New Institutionalism in Organizational Analysis by Walter W. Powell, Paul J. DiMaggio. Copyright © 1991 The University of Chicago. Excerpted by permission of The University of Chicago Press.
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