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New Institutional Economics, the Anthropomorphization of Institutions and Pathologies of Organisations

New Institutional Economics, the Anthropomorphization of Institutions and Pathologies of Organisations

One of the main weaknesses of New Institutional Economics (NIE), identified by Herbert Alexander Simon (1991), is the inability of NIE to understand organizations, and thus the institutions themselves, on account of the fact that the mechanisms and tools used in this sense had been derived from neoclassical economics and from the market. 

What this article argues is that a complete understanding, even through more advanced or innovative tools and mechanisms, is impossible, and that what NIE can do is interpret organizations and institutions in its own paradigm, which then of course can constitute the object of some criticisms regarding the accuracy or applicability; however, this is not the focus here. Thus, one of the reasons why NIE and, implicitly, any other economic perspective would have difficulties in understanding organizations and institutions is due to the fact that they have borrowed many of the characteristics of those who lead them. In this way, we arrived at “organizational pathology” or “institutional anthropomorphism”, because the institutions have acquired new characteristics that made them unpredictable, as such as anthropomorphism, while also producing problems, such as pathologies; this article proposes an overview of NIE, as well as criticism of it. 

In this regard, what has been identified as pathologies of organizations as well as the anthropomorphization of the institutions, will be addressed. The last part will be devoted to explaining, based on those presented so far, the impossibility of NIE having a different understanding than the paradigmatic one regarding organizations and institutions, regardless of the mechanisms and concepts used in this regard. Finally, the conclusions do not aim to give a final verdict, but rather to launch a constructive debate that can contribute to the process of understanding the area of ​​the New Institutional Economics.

New Institutional Economics 

Founded by Ronald Coase over several years, first in a 1937 article, “The Nature of the Firm”, later in 1960, in “The Problem of Social Cost”, and most recently conceptualized by Oliver Williamson, in 1975, in his Markets and Hierarchies: Analysis and Antitrust Implications, A Study in the Economics of Internal Organization, NIE sought to expand the focus and economic outlook on institutions and organizations that could influence the economy and economic activity. It was trying to differentiate itself from the classical institutional economics, which focused more on understanding the role that institutions had in structuring and regulating economic behaviour, in the works of Veblen (1988), Bromley (2009), Hamilton (1919) or Dewey (1896), but neither wanting to be part of the neoclassical economics, enrooted in the marginalist revolution, which covered a wide variety of topics, especially through the works of Menger (1976), Clark (1998) or Walras (2010). Therefore, NIE proposed a new approach. 

Broadly speaking, NIE considers culture an important element with regards to economic development which differentiates NIE from neoclassical economics and starts from the premise that individuals are characterized by a rational behaviour that aims to maximize their preferences. However, even rational behaviour has its limits, from informational, cognitive, to administrative in terms of monitoring, planning, and enforcement of desired processes. In this landscape, NIE introduces institutions and organizations as intermediaries in processes ranging from contractual safeguarding, bargaining, or cost monitoring to being an integral part of concepts such as human assets, moral hazard, ideological values ​​or social norms (Ménard & Shirley, 2019). Thus, NIE tries not only to delimit itself from the area of neoclassical economics, but also to provide answers to some of the problems it had. One of these, which is also the basis of NIE, is the understanding of the process of change in the economy, when change has as its causes the political and social aspects of its existence (Furubotn & Richter, 2011). NIE introduces, in an attempt to provide certain answers, the part of institutional analysis as a methodology. In this way, it creates a hybrid, because it borrows methodological elements from areas that vary from anthropology to law or even sociology. The ambition, sometimes stated in NIE circles, was and still is to change neoclassical economics from an apparently immobile status quo, which does not try to intrinsically understand its potentially dynamic nature change, to a dynamic one in which change and its causes play a fundamental role (Brousseau & Glachant, 2008).

In order to frame and define as well as distinguish between organizations and institutions, NIE is based on the principles and criteria stated by Douglass Cecil North (1995). It characterizes the institutions as the ones that give the rules, both formal and informal, of the economic game, and thus are the basis for modelling the economic behaviour of the individual, as well as the basis of social interactions, thereby providing the means for contouring the institutional framework. Organizations, on the other hand, are formed by individuals, based on institutional rules. Each organization is in competition with its counterparts, trying to ensure its survival, while equally attempting to perform in front of said entities, with which it is in a relationship of strife, but also to perform in front of other organizations with which it is in a competitive relationship. In this sense, organizations must undertake different and diverse activities that provide them with the skills and abilities necessary to achieve their goals in front of competitors (Ménard & Shirley, 2019).

NIE thus tries to understand not only the area of ​​rules and the institutional framework of the market or economy, but also to gain a comprehension of how the area of ​​organizations evolves and how people form certain beliefs, as well as determining the causes underlying their formation. In this way, the picture in which the institutional framework outlines and regulates the market area is complete, with the organizations coming in addition to the standardization and exploitation of the dynamic characteristics of the market. As for the governmental side, as a primary institution, NIE adopts neither the liberal nor the realistic view of government, in so far as its intrinsic existential condition is concerned, but rather tries to address the issue at the micro level by focusing on how the movements at the institutional level and organizations then impact the government (Yeager, 2019). Hence, the question naturally arises of how it is possible to balance the actions of the state between being and acting decisively, while at the same time not being abusive. In fact, this is reflected in one of the NIE dilemmas, namely that investments increase when the state is strong and protects property rights, albeit the same state is strong enough to exercise, concomitantly, the action of expropriation (Akansel, 2020).

Criticism 

In addition to Simon’s (1991) critique of the NIE’s inability to understand organizations and institutions, there are other issues that NIE has, which are reflected, in one way or another, in the same capacity of understanding organizational and institutional phenomena. Thus, besides the structural agreement, NIE cannot include the aspects of power relations, conflict, and networking within any social structure with organizational or institutional character. This is due to the fact that the methodological foundation of NIE is, in fact, individualism, marginalism, and a micro rationalism that derives from a realistic rational perspective that excludes, more or less, the principle and possibility of cooperation. Moreover, in this paradigm, NIE also excludes evolutionary dynamics, implicitly the historical aspect of the economy’s evolutionary dimensions (Ménard & Shirley, 2008). To replace it, NIE tries to propose fundamental principles and laws, once again calling upon the theory of rational choice and the rational actor model as a basis, which could transcend the line and the spatio-temporal limit. In this way, everything related to the evolution, impact, dynamics, and importance of organizational and institutional systems, as well any trace of behaviourism, are ignored and viewed through a rational prism of cost-benefit analysis. Thus, instead of trying to understand certain complicated mechanisms, NIE chooses to simplify and rationalize in what seems to be an attempt to overcome an obstacle, rather than cultivating a predisposition towards learning and understanding (Richter, 2015).

At the same time, other NIE problems can also be identified. For instance, in the fundamental process on which NIE is based, namely that of transactions, it is not possible to take into account an important factor, deriving exactly from the evolutionary dynamics that NIE does not accept; namely, that of innovation. Assuming that the cost of a transaction is influenced by the dynamics, and therefore has to do with a fundamental factor, NIE tries to expose its active influence on the concerned aspects of the economy by using the area of development and extensions-expansions from the transactional model as a driver for the emergence of new techniques and resources (Ménard & Shirley, 2008). Even if, in some models, the part of innovative dynamics can be replaced with that of capabilities development, NIE cannot, being, in fact quite difficult, make a clear classification in terms of model framing, nor can it include unilaterally all existing models under the incidence of the capabilities development (Furubotn & Richter, 2011).

Last but not least, NIE also fails to explain and understand the part of institutional interaction. For example, when it comes to situations in which the organizational environment meets with institutional structures, all that NIE does is identify the main actors in the status quo. However, it cannot explain how the result of the interaction, i.e., the part of institutional rules and the part of organizational norms, influences the economic area (Ménard & Shirley, 2019). By default, NIE cannot show the degree of impact that the movements of any of the parties will have on the economic sphere, nor how this will be felt. In fact, NIE (this being another major valid instance of factual criticism) does not offer models for areas where the economy is in an overlap with other areas, domains, spheres, and, rather than proposing models and solutions, tries to see everything through the prism of the singular rational model (Parada, 2005).

The anthropomorphization of institutions 

NIE encounters two problems in its attempts to establish itself as a counterpart to neoclassical economics, namely the anthropomorphization of institutions and organizational pathologies. The former is inherent in any state system, and is also of a recurring nature and with still few solutions able to address it (Gagliardi et al., 2019). Thus, at the social level, there is a very strong tendency to anthropomorphize state institutions by assimilating the function, institution, and political office of a person, which can range from president, prime minister, to parliamentarian or civil servant. Its recurrence can be explained by the fact that, for a long time, in the architecture of the state and in the hierarchical system, there was only one person, the state leader, who embodied him and who was assimilated to the state precisely by the immense power he possessed. But, with the advent and multiplication of the offices, be they political, administrative, legislative or judicial, that one person could no longer represent the state because his status had been greatly diminished. 

However, the tendency of anthropomorphization remained, and it came to the institutions to be subjected to this process by the social dimension (Inglehart, 2015). This is somewhat difficult to understand, since the power was no longer an undeniable instrument of a single individual, and rather the state, as an entity, was no longer represented by a person, but by a system of checks and balances that then generated and validated the actions that the state took as a bureaucratic system, and not so much as an entity. 

Yet, anthropomorphization has been implemented for two main reasons: first, there are functions that still concentrate great power in the hands of a single person, such as the president of a presidential system or the governor of a federal system. A second cause is that, even within the offices, albeit not with similar amounts of excessive power, there is a hierarchical ladder at the end of which there is only one individual. Even if the leader does not actually have much power, the fact that he is at the top of the pyramid helps him identify in the eyes of the social sphere as the institution itself, and not just as a voice, or as a representative, as was intended in the beginning (Bondarenko & Kowalewski, 2020). 

In order to curtail this phenomenon, an attempt was made to define the state as rather a political structure of a static nature and thus the effect of the movements of an institutional tectonic nature and implicitly the resulting anthropomorphization would have been mitigated. However, the state is dynamic, and institutional dynamics represent and play an important role in this regard. What happens through the dynamics and institutional movements, sometimes of a tectonic nature for the state architecture, is usually automatically anthropomorphized because the decision coming on a hierarchical scale is very difficult to conceive as the result of a consultative and discussion process, as it should happen, but it is rather seen as the will of a single person (Jessop, 2013). Thus, a two-edged solution for the situation appeared namely, the institutional accountability which tried to depersonalize the institution of its anthropomorphic nature and to make it rather be the single subject of accountability, just like the state itself. The idea was that the institution has, in its own DNA, the tendency to comply with the rules, norms, laws, and customs that come both from the interior, such as regulations and statutes, but also from the exterior, such as legislative acts. By violating them, the institution would be accountable, first before the competent bodies, but also before its own control mechanisms that had the role of regulating its activity (Isaacs & Vernon, 2011). On the one hand, this has succeeded, but on the other hand, it has done nothing but emphasize even more the role that the individual at the top of the hierarchical apex has, because it is often the case that the institutional leader is accountable for the whole institution, and his resignation and removal is considered sufficient, emphasizing once again the already existing area of ​​institutional anthropomorphization (Czarniawska, 1997).

In other words, the solution itself proved to be quite flawed, and did not produce the expected results, leaving this problem unsolved, while the effects of anthropomorphization are increasingly visible. Examples, such as institutional discrediting as a result of the leader’s actions, the institution becoming a victim in a political war and therefore being emptied of content (because the leading character is identified with the institution, and thus an institution can be emptied of power precisely in an attempt to get rid of the leader). For example, the cases of a parliamentary speaker conflict are more than eloquent in terms of the damage that institutional anthropomorphization can do and has done (Platteau, 2006).

Organizational pathologies 

The second problem for which NIE has no answer is that of organizational pathologies. If, through anthropomorphization, institutions take over humanoid traits and characteristics, organizations, in an inverted manner, take over the life cycle and human pathologies. The cause is quite cynical namely, the lifespan. Institutions are organisms that survive cataclysms and changes, and whose adaptation mechanisms have been perfected over time, having the power to regenerate precisely through the experience gained. Instead, organizations have a much shorter lifespan, because their purpose is limited, which is the main aspect of their existential condition in the first place. After fulfilling the purpose, they become useless and disappear, or they can be destroyed by the fierce competition that exists in each niche, because organizations are also more numerous than institutions, and thus have greater competition (Bondarenko & Kowalewski, 2020). 

Thus, as in the human life cycle, pathologies such as diseases, disorders, more or less major deficiencies or even fundamental malfunctions, are interspersed in the life of an organization and are often the causes of the ceasing of its existence. Following a natural life cycle, organizations will go through sequential stages, with a hierarchical progression which will include and involve a wide range of structural activities, so that an end is inherent and inevitable (Mouzelis, 2017). The pathologies of organizations take them out of the paradigm of natural systems, and bring them into the life cycle area which may not respect the stages of genesis, evolution, apogee, decline, and death, but rather have the potential of being abruptly interrupted by an anomaly such as pathologies themselves. 

There are, indeed, equally chronic or treatable pathologies; therefore, pathogenesis becomes very important in the area of ​​prevention and treatment of such phenomena, in order to prevent their chronicity or exacerbation. Examples of organizational pathologies can range from poor organizational policies, to poor and inefficient management to problems of communication, collaboration and prioritization (Beigbeder & Dijkzeul, 2006). Their frequency and recurrence are quite high; so, in general, the focus is on identification, mitigation, and treatment. Thus, at the time of pathology, the survival of the organization is heavily dependent on internal factors, such as the task environment, or external factors, such as the shocks that the organization may receive from the external, or general, environment. The internal factors, or the task environment, refer to everything related to the industry, area, field, or domain in which the organization operates, while the general environment is defined by spheres outside the organization that can affect it, i.e., economy, technology, politics or the social sphere (Kleres, 2019). The task environment can cause a failure through pathology if the organization is no longer competitive in its niche, while a pathology in the general environment can be generated by crises, cataclysms, political instability, or other events with a major impact that usually cannot be predicted and, therefore, mitigated (Mouzelis, 2017). 

Even so, there are indicators, parameters, that can help diagnose pathologies, whether they come from the task, or from the general environment. These parameters maintain the stability and competitiveness of the organization, and range from organizational culture, to structure and structuring, to socio-economic management, and to things like patterns of behaviour (Schwaninger, 2010). The impairment of any of these factors can serve as a pathogenesis that is felt in the task environment and, thus, pathology occurs. Among the pathologies that can occur is solutionism, namely the self-gratification that the company receives through and from solving problems. But, when a solution is found and implemented, it must be tested against other types of problems as well as on different action scenarios. This leads to the creation and emergence of artificial organizational problems, which require other solutions, and again the consumption of effort and resources, which could be redirected to other purposes (Leberecht, 2015). 

This is far from saying that problems should be ignored; solutionism is as harmful as ignoring problems, because it multiplies them in the name of solving them. Another type of pathology is represented by autoimmune diseases that occur due to deficiencies in the immune system of organizations. One such example is when there is too much of a push for results; when things are going well, it can turn into a groupthink and less innovative spirit, on account of the abuse of pushing towards performance which, through over-cohesion or uniformity, leads to nothing but a decrease in creativity (Bruni, 2021).

Why it is hard for NIE to explain the anthropomorphization of institutions and organizational pathologies 

After seeing what difficulties NIE encounters, namely the anthropomorphization of institutions and organizational pathologies, it is time to see why it cannot be accused of not understanding these phenomena. First, in terms of institutions, the economy has always had difficulty understanding how they work. Neo-classical economics has chosen to ignore the majority of institutions, and major criticism is formulated by Lawson (2003) regarding the way in which functional relations are misinterpreted and used in a paradigm that tries to use and explain the impact of the social area on economy. 

Classical Institutional Economics has tried to explain institutions through the rational actor model while discussing evolution as well, which could somewhat succeed, but still did not manage to understand the role of the institution of law and how it impacts the economic area, especially in the context of ​​economic growth (Furubotn & Richter, 2011). On the other hand, Mitchell (1950), Berle (1962), Ayre (1938), Hamilton (1919) or Veblen (1988), from the area of ​​classical institutionalism, never had a specific preoccupation with the area of ​​institutions per se but rather tried to analyse the evolution in the area of ​​technology seconded by the institutional evolution.

In the area of ​​organizations, neoclassical economics is stuck on ​​methodological individualism, in which the individual is independent in relation to social phenomena, though, on the other hand, social phenomena cannot be independent of individuals. In other words, transposed into the organizational area, where the organization is the result of a social phenomenon, it is very difficult to explain why the organization experiences pathologies (Udehn, 2014). Thus, a pathology, in this case being an organizational phenomenon, can occur regardless of individuals as a result of external circumstances, as shown above, and therefore, the methodological area of ​​the neoclassical economy is shaking because, at structural level, it is close to denying complex social phenomena, ergo the area of ​​organizations and then that of institutions. In the area of ​​classical institutional economy, organizations are confused with institutions, but, in this way, they seem to be emptied of substance since there is, in theory, no individualization of them (Mäki et al., 2006)

What NIE brings is, in fact, a much more focused approach on the two concepts: that of institutions, and that of organizations. NIE, however, aimed to solve the problems of the classical institutionalist economy, namely to acknowledge the essence of the two concepts and, on the other hand, to delimit itself from the neoclassical economy; that is, from that methodological individualism. But, even for NIE, it is difficult at this time to explain the anthropomorphization of institutions and organizational pathologies, since it does not have such a solid foundation in contrast with neoclassical economics which has been and is much more developed, with a large number of branches and theories, nor can it be based on the area of ​​the classical institutionalist economy, which clearly had difficulties in the conceptual area (Boland & Warlow, 2016). Thus, NIE must first build and substantiate, so that only later can it move to the deepening area. In other words, it cannot be claimed from NIE, which is still in the development zone, to explain and understand something that the neoclassical economics or the classical institutionalist economics are based on, included to begin with, yet transcend NIE’s area of competence. Simon’s (1991) critique is correct, namely that NIE cannot explain organizations and institutions, but, at the moment, NIE had no way to do such things, since it is eternally developing in the theoretical area, and has not reached a peak in terms of applicability. Otherwise, what the neoclassical economy built centuries ago on the works of Ricardo (1973) and Smith (1991), or classical institutionalist economy, on the works of Veblen (1988) and Hamilton (1919) in the early 20th century, cannot be claimed from NIE, which was founded only after the 1960s.

Conclusions 

The article did not aim to be a kind of critique of NIE, for its obvious weaknesses, but neither is it a defence of NIE, which may still have some solid arguments. What it set out to do is present both facets of the problem, which is a much more complex one than hinted at in these brief pages. Thus, the issues of the anthropomorphization of institutions and pathologies of organizations are not only a feature of NIE, but rather, a systemic problem that the economy is facing and which, in a way, has led to the emergence of NIE. However, NIE is still far from explaining the two phenomena precisely because Economics itself had, as NIE tried to solve, conceptual difficulties in understanding organizations and institutions. This shows that the problem is one that Economics is implicitly aware of, hence Simon’s criticism of NIE, which arises precisely from the intrinsic need for someone to finally explain these phenomena and solve the area of ​​conceptual understanding. However, it is not fair to ask from NIE to solve in a much shorter time what others have failed to explain for three centuries. The critique is not baseless, only that it does nothing but show that there is a need that has not yet been met, which has, otherwise, become imperative, since understanding complex social phenomena, implicitly organizations and institutions, is vital at this time and especially for their problems, the so-called anthropomorphization and pathologies. NIE can provide the answer to these questions, problems or, on the contrary, it can fail, but, for this, it needs to be given more time after which we can move on to an evaluation and implicitly a well-founded critique. Until then, NIE must make the most of the head start in development that both the neoclassical and the institutional economics have had before it.

Photo source: [1] pxhere.com; [2] flickr.com.

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OEconomica No. 1, 2016