Institutions (as rules of the game)

In ordinary speech an institution is an organisation: a department, a university, a bank. In the literature this course uses, that is exactly what an institution is not.

Douglass North defined institutions as “the rules of the game in a society or, more formally, the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic.” Organisations are the teams. Institutions are the rulebook they play under, and North included informal rules and norms alongside formal law.

The move this gives you: if a team keeps losing, read the rulebook before you blame the players.

The image the course uses is two Filipino crews shooting on the same Tuesday. One has a completion bond, a signed call sheet and an insurer. One has none of those. Same skills, same people, different behaviour by Friday. Nobody’s character changed between the two sets.

North also noted that any organisation facing rules has three options: maximise under them, spend resources changing them, or cheat. Most Philippine institutional history is a record of which option was cheapest.

Source: Douglass C. North (1990), Institutions, Institutional Change and Economic Performance, Cambridge University Press, where the definition above appears. Paid, with chapter 1 previewing free at Cambridge Core.

First used in: 2.3 · Why a decent person sells a vote