Brokers and Bureaucrats: Building Market Institutions in Russia

1. Institutions and Social Order: Sociological and Economic Approaches

CHAPTER 1 Institutions and Social Order Sociological and Economic Approaches The Big Picture: Specifying the Problem of Social Order How do people trade given powerful incentives to cheat? The reliable exchange of goods, services, or votes requires that both parties to an agreement believe that the gains from compliance exceed the gains from cheating.1 In the absence of reliable enforcement by a third party, such as the state, the gains from cheating are often simply too tempting to ignore. Cheating is not the only impediment to trade and social order. Unforeseen events may provoke disputes among even the most well-intentioned parties (Grossman and Hart 1986). The cost of specifying all the conditions under which a contract is valid makes all contracts incomplete. This necessary incompleteness leaves many aspects of contracts open to interpretation and subject to dispute by even the most honest individuals. The ability of economic agents to trade goods with some degree of confidence that the agreement will not be violated is a central element of economic growth. Economic agents in countries with institutions too weak to protect property rights often decide to forgo potentially profitable investments . And when they do invest, they often must expend great resources to protect their rights. Across a wide range of fields, scholars argue that the failure to create institutions that protect property rights is perhaps the greatest impediment to economic growth in the developing world (North 1990; Olson 1996; Sened 1997). We usually view the state as the organization that enforces contracts and provides the cornerstone for social order. Acting as the third party to all contracts, the state raises the costs ofcheating above the gains by threatening coercion against those who violate contracts. In many instances, however, the threat of state enforcement is not credible. In countries with weak judicial systems, disorganized bureaucracies, or ineffective regional governments ' the state often lacks the capacity to be a neutral third-party enforcer 17 18 Brokers and Bureaucrats of many disputes. Even within developed states, the threat of state enforcement is often not credible due to the cost, length, and uncertainty ofthe legal process. All market economies rely on a mix of state-governance and selfgovernance . This chapter identifies the incentives that create the problem of social order and presents self-governing organizations (SGOs) as one means for minimizing this problem. It critiques the two dominant theories of self-governance drawn from sociology and economics. It then evaluates these approaches against evidence from the five cases at hand and finds that they have important empirical shortcomings. Creating Institutions: Demand and Supply Agents seeking to create institutions that n1itigate the problem ofsocial order face obstacles on both the demand-side and the supply-side. On the demand side, agents must overcome the first-order collective action problem of organizing to create an institution that promotes cooperation (Olson 1965; Hardin 1968). Focusing on an actor's choice to contribute to an irrigation project whose benefits are available to an entire community easily captures this logic. When the choice is made in the absence of a third party to compel members to contribute, each individual will have weak incentives to contribute to the project. Because everyone can expect to enjoy the benefits ofthe project whether or not they contribute, each n1ember prefers to enjoy the benefits without making a contribution. As each group member can foresee this logic, few contribute, irrigation is not provided, and all group members suffer. Individual demand for an institution is rarely sufficient to explain its production. It is less well recognized, but agents must also overcome a collective action problem on the supply side. Robert Bates notes: «The new institutionalism is contractarian in spirit. Institutions are demanded because they enhance the welfare of rational agents. The problem is why are they supplied ?" (1988,394-95; also Ostrom 1990,42). All players seeking to provide a public good may agree that they would be made better off by its provision, but each member wants someone else to supply it. Moreover, agents with resources to supply an institution often have the ability to parry demands for an institution. For example, supply-side agents within the state may blunt demands for an institution by using coercion or co-optation against interest groups. Satisfactory explanations for the creation and maintenance ofinstitutions should account for both their demand and supply. Institutions and Social Order Self-Governing Organizations: Repositories of Reputation 19 Many...