in Economics

Social Engineering and the Institution

So this time I’m back to economics. But, in my defence I had a late night last night and anything more creative is going to be too much of a challenge in the hour I have to write this.

In development there is a lot of talk about ‘institutions’ being key drivers of economic development.

Essentially, an institution is a way of going about business or the ‘rules of the game’ of life.

For example, businesses in Papua New Guinea might not be seen as a separate identity to that of the owner like it is in Australia. Consequently, this might result in social and family relationships being relevant to how it operates.

This might mean charging lower prices for people in the community when compared with those from outside the community.

Alternatively, in the West we may find it perfectly acceptable to gain employment as a consequence of our social network, where if this was a consequence of our family networks this might not be acceptable.

Institutions: the formal and informal

Now, as you might have guessed the rules that might define this extend beyond that of formal laws and regulations, to the social ‘norms’ (or informal institutions) which prevail in a society. The rules also can directly influence and interact with one another.

For instance, imagine we split a country in two. Both of the sections remain exactly the same, until one day when Country A decides to provide pensions to anyone above the age of 60, whereas Country B doesn’t.

In Country A with there no longer being an obligation to look after the elderly, youth might tend to be more comfortable moving further from home. Furthermore, as the financial burden has also been reduced for younger members of the family, an individual may work less for a given amount of money. Also, because the elderly are less financially reliant on the working members of the family they may exert less pressure (in the form of expectations) about the types of careers which are appropriate for working members of the family.

Finally, over time youth begin to reduce the extent to which they remain in contact with their extended family both due to their wider geographical dispersion (from emigrating further from home) and the need for them to maintain relationships being reduced. Specifically, because they are confident they themselves will receive a pension, they become less likely to see the benefit in investing time and energy in maintaining family ties.

In recognition of the lack of a pension individuals in Country B tend to save and work more hours in order to support their wider family and to some extent themselves in the future.

Importantly, the obligation of care imposed by this system is symbiotic in that it tends to be maintained for the mutual benefit of all members of the family. After all, youth are going to need to be supported someday, so maintaining this relationship acts as an additional form of ‘savings’, as provided the family relationships are maintained, they can expect to receive a return in the form of being cared for in their old age.

As a consequence of these different formal and informal institutions Country A tends to be more individualistic, whilst Country B tends to be place more emphasis on the community. Gaining a job through family connections therefore becomes acceptable in Country B, but not in A.

Now both these examples are obviously simplistic. However, the point of them is to illustrate those small differences in formal and informal institutions might make all the difference to the tangible outcomes that might be expected and therefore relative levels of economic development.

It’s not the economy stupid

Now, in many ways this seems obvious right? I mean ‘good rules’ by virtue of being ‘good’ will tend to exist in ‘good’ countries.

Well yes, at least provided what you define as ‘good’ lines up with the outcomes of society. However, unless we are comfortable with this tautology we have to at some point define what we consider to be a good outcome. The choices abound and could include happiness (if you can measure it!), life expectancy and income.

But imagine if we start thinking about this idea from a micro perspective. That is, we use the idea of formal and informal institutions to talk about the way organisations work and achieve (or don’t ) their outcomes.

So instead of talking about how institutions contribute to economic development, we think about how it might influence a business, NGO or sports team and how they operate.

Conversations at the water cooler

What I want to say is that the institutions idea is alive and well in the workplace. In fact, I have worked in places which have formal and informal rules which I think approximate what I have experienced in the developing world. Specifically, cultures and rules have developed which are completely in conflict with the organisation’s overall objectives.

This is exhibited by poor lines of communication, norms which discourage innovation, formal rules which are inflexible and discourage mobility throughout the organisation and extreme resistance (even outright hostility) to change.

I’ve worked in places where when responding to my requests, entire teams close off, rather than embracing the opportunity to change. Obviously resistance to change isn’t a new thing, but what makes this important is that this occurred to the detriment of their core mandate. Much like what one would predict in many developing nations.

And this is what I want to emphasize. When we think about the idea of ‘institutions’ I think we often get caught up with the idea as if it represents something ‘out there’. However, it’s application is much closer to home than that, with it being an idea which has an undeniable relevance to the everyday.

So both in respect to development and organisational change we are on some level faced with a similar question. How do you become a driver of change in informal institutions when we only have direct control over the formal? Moreover, how do you stop dysfunctional social norms resulting in a vicious spiral for a nation, or an organisation?

Of course I’m not intending to answer this. But I would like to suggest that perhaps many of the techniques we use for managing change in an organisation are equally applicable for managing change in wider society.

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