Emerging Trends in The Social and Behavioral Sciences

Institutions and the Economy

Media

Part of Institutions and the Economy

Title

Institutions and the Economy

extracted text

Institutions and the Economy
CARL GERSHENSON and FRANK DOBBIN

Abstract
Sociology, political science, and economics have undergone parallel revolutions
since the late 1970s, following on the heels of the behavioral revolution of the
1950s and 1960s. Four distinct institutional paradigms have emerged: sociological
institutionalism, rational choice institutionalism in political science, historical institutionalism in the same discipline, and new institutional economics. Sociologists
argue that economic institutions—which encompass paradigms, conventions,
rules, and regulations—shape modern behavior. National institutional differences
produce stable patterns of economic behavior within countries, but institutions
themselves change over time. Four recent trends in sociology are reviewed: studies
of the global spread of regulatory institutions; studies of the use of economic
theories to support policy design and economic conventions; studies of market
actors as social movements promoting economic change; and studies of the moral
and cultural underpinnings of the economy.

INTRODUCTION
Sociologists, political scientists, and economists have devoted a great deal of
attention to the role of institutions—which encompass paradigms, conventions, rules, and regulations—in shaping economic activity, and have moved
away from treating the individual as the central determinant of social, political, and economic outcomes. Institutionalists explain continuity and change
in economic life as a consequence of the structure of institutions. They also
study how institutions shape preferences, cognition, and behavior, which in
turn influence new political, economic, and social patterns.
The first wave of sociological institutionalism focused on how policies and
practices within firms gained a life of their own, becoming “institutionalized.”
Zald and Denton (1963), Selznick (1949), and Clark (1960) showed that individuals become cognitively attached to certain policies and practices, seeing
them as vital to organizational success. They also build up interests around
existing institutions, such that they defend those institutions against challenge.
Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.

1

2

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

The second wave of sociological institutionalism used social constructionism to explore how new organizational institutions (policies, paradigms,
structures) arise among organizational fields comprising firms, regulators,
and professional groups (DiMaggio & Powell, 1983; Meyer & Rowan, 1977).
The optimal means for achieving efficiency and equity are socially negotiated, although those means become objectified in the minds of modern
actors, who come to believe them to be determined by transcendental
economic and managerial laws and precepts. That paradigm has expanded
its purview to national markets and political institutions (Dobbin, 1994;
Fligstein, 1990).
In political science, two versions of institutional theory have taken hold. In
the rational choice version, institutions shape the preferences of individuals
in the political system. Broadly speaking, institutions conceived as regulatory
and political rules are developed and persist to reduce political and economic
uncertainty (Shepsle, 2005). At the national level, decision-making institutions in the political realm influence the economic preferences of different
groups in society, and they determine the policy outcomes of negotiations
and of parliamentary and congressional votes. For example, systems containing veto points may prevent groups from compromising (Tsebelis, 2002),
while other institutional arrangements promote compromise. Rational choice
institutionalists conceive of institutions as rules of the market, making markets predictable and giving them structure. They also conceive of institutions
as rules of political exchange, making policy decisions predictable and facilitating strategic action.
In the historical version of political science institutionalism, national political institutions gain inertia and become resistant to change (Moore, 1966;
Skocpol, 1979). Inertia comes not only from the stability of formal rules but
also from the effects of rules and structures on how people conceive of society, polity, and the market (Campbell, 1998; Hall & Taylor, 1996; Steinmo,
Thelen, & Longstreth, 1992). Broad policy institutions, according to Krasner
(1984), tend to persist in equilibrium until a shock leads to the creation of
new institutions. Thelen (2004), by contrast, describes institutions as changing incrementally, so that a revolution can come about through small steps.
Political systems are path-dependent, such that an early policy choice determines the policy options available at a later date (Pierson, 1994).
Institutionalist economists, who predate the dominance of the neoclassical
model of economic behavior (Yonay, 1998), argue that economic action
is shaped by social institutions and evolves over time (Veblen, 1904).
Commons (1924) viewed institutions as offering collective control over
individual behavior and thought careful design of public policy could steer
individual behavior. After the rise of the individualistic, neoclassical model,
Williamson (1985) and North (1990) articulated a more rationalist approach

Institutions and the Economy

3

to institutions. Williamson (1985) presents the corporation as an institution
that reduces transaction costs by “internalizing” them, rather than leaving
all transactions to the market. He later extended this approach to economic
institutions more broadly, emphasizing that institutions allow economic
actors to minimize transaction costs.
INSTITUTIONS AND ECONOMIC SOCIOLOGY
For sociologists, institutions play a fundamental role in the economy. For
economists, institutions allow market actors to reduce transaction costs,
whereas for economic sociologists, this puts the cart before the horse. Without social and regulatory institutions, there would be no market activity,
and thus no transaction costs to speak of. Institutions are constitutive of the
economy (Block & Evans, 2005). All economic activity is embedded in social
institutions (Krippner & Alvarez, 2007).
Because institutions, or social conventions, create the framework within
which economic activity is undertaken (Scott 2001), sociologists do not see
the regularities that seem to shape economic life as either invariant or exogenous to economic, political, and social processes. Rather, while it may seem
that the economic world is governed by eternal law-like verities, economic
laws themselves are social products that demand explanation. Institutional
explanations of economic life therefore cannot rely on universal covering
laws, but rather must point to social factors such as culture, socially generated cognition, and power.
In culturally oriented theories, regularities in economic life are only mistaken for laws, perhaps because they are formalized and diffused through
expert knowledge networks comprising economists (Fourcade, 2010), top
executives (Fligstein, 1990), consultants (Strang & Meyer, 1993), and public
policymakers (Roy, 1997). Regularities in ways of thinking, acting, and
seeing the world become part of the taken-for-granted cultural inheritance
of a nation, and solutions to new problems are found in the solutions to
old problems (Dobbin, 1994). Just as early organizational institutionalists
argued that organizational practices become imbued with meaning by
participants, and come to be seen as singular means for achieving particular
goals (Selznick, 1957); and just as organizational sociologists argue that
existing corporate policies constrain the solutions managers can envision to
new problems (March & Simon, 1958); institutionalists studying the wider
economy and polity argue that existing policies and practices constrain the
range of imaginable policy options for the future (Hall & Soskice, 2001;
Whitley, 1992).
Power theorists argue that regularities prevail in economic life because the
powerful shape economic institutions to their liking—for example, favoring

4

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

large limited-liability corporations to networks of smaller partnerships (Perrow, 2002). Power and institutions play supporting roles at different points
in the process of institutionalization, as Roy (1997) illustrates in his work on
the history of the firm. For Roy, power explains the creation of legal institutions that favor certain interests, but when these institutions become taken
for granted they remain influential after those who promoted them are gone.
They persist because people come to see them as natural and rational.
Economic sociologists use cross-national research to highlight the importance of institutions (Kristensen, 1996; Whitley, 1992). By showing that countries with widely different institutions can achieve similar levels of growth,
economic sociologists and “Varieties of Capitalism” scholars contend that
there is no single optimal set of institutions that all countries are destined
to converge toward (e.g., Hall & Soskice, 2001; Hamilton & Biggart, 1988).
Guillén (2001) argues that institutions confer comparative advantages that
determine which industries can prosper in a given nation. More generally,
institutions that allow states to remain autonomous from business interests
without losing touch with those interests’ legitimate needs tend to facilitate
economic development (Evans 1995).
Where are institutional studies in economic sociology headed? Early studies often focused on ways in which institutions reinforced existing social,
political, and economic patterns, whereas the recent trend has been to examine temporal changes in institutions and their implications for economic systems. We discuss four trends in institutional analysis: studies of (i) the global
diffusion of regulatory institutions, (ii) the use of economic theory to support
institutional choices, (iii) market actors as social movement organizations,
and (iv) how moral and cultural institutions shape the economy.
THE GLOBAL DIFFUSION OF REGULATORY INSTITUTIONS
Studies documenting the diffusion of regulatory institutions across borders
often describe the effects of the world polity and of neighboring countries
on national institutional arrangements. Thus, Lee and Strang (2006) chart
the diffusion of British-style public-sector downsizing, following Thatcher’s
experiments. Over time, many countries cut the size of government. Learning from the experiences of others was mediated by neoliberal theory, which
defined downsizing as an effective means of promoting growth and balancing budgets. Countries only took the lesson from previous downsizers when
those lessons lined up with theory. In periods when previous downsizings
failed, they ignored evidence inconsistent with theory.
Yet other studies document that in the process of diffusion, regulatory
institutions can be significantly altered, or “translated” (Czarniawska &
Sevon, 1996). Djelic (1998) examines the diffusion of the US corporate form

Institutions and the Economy

5

to Europe in the years after World War II, finding that local institutions and
traditions determined whether that model would be imported, rebuffed, or
significantly altered to fit local traditions. Halliday and Carruthers (2009)
show that a global consensus on the appropriate corporate bankruptcy
institutions emerged following recent crises and then diffused widely to
countries at different levels of development. But many countries so altered
the international conventions in the process of implementation that their
policies were unrecognizable, while others adopted the policies in toto only
to disable them in the process of implementation.
THE USE OF ECONOMIC THEORY TO SUPPORT INSTITUTIONAL CHOICES
In recent decades, economic theory has played an increasingly important role
in justifying institutional choices of all sorts, from welfare policy (Steensland, 2008) and labor market policy (Martin & Swank, 2004; Thelen, 2004)
to financial policy (Krippner, 2012). Particularly striking is the application
of market logics in arenas that were thought to be subject to alternate logics, as in the case of social welfare (Pierson, 1994). Unemployment insurance
has been rebranded as a part of “active labor market” policies, and the logic
of provision for the needy has been displaced by a logic of incentivizing
the unemployed to seek work. Clinton’s 1996 welfare reform legislation was
framed as an effort to reinforce market mechanisms, with a view to unleashing economic forces to trim the welfare rolls.
Studies of public policies have shown that policymakers use economic
theory strategically and opportunistically to justify their favored policy
choices. For instance, Jabko (2006) shows that European Union regulators
use the rhetoric of economic theory to support a wide range of policies that
depend on very different regulatory logics. “Marketization” can mean just
about anything. Krippner (2012) shows, by contrast, that the “deregulation”
of US financial markets resulted not from a master economic plan but from
a series of decisions made for political expediency. Designed to soften the
blow of recessions by controlling interest rates, these decisions were later
rationalized with the rhetoric of deregulation.
Prasad (2012) shows that laissez faire rhetoric, as applied to the deregulation of US mortgage markets, conceals a more complicated reality. Despite
the story that the United States had a weak welfare state, since the 1940s a
system of mortgage supports has subsidized the middle class and produced
countercyclical Keynesian mortgage spending.

6

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

MARKET ACTORS AS SOCIAL MOVEMENT ORGANIZATIONS
A number of scholars treat markets as instances of the more general concept of social fields (Fligstein & McAdam, 2012), showing that professions
and social movements can alter economic institutions and activity. Thus, economic change may be precipitated by social movements as well as by market
forces.
Fligstein (1990) explores how groups of management professionals led
a social movement to change the structure and strategy of corporations.
After World War II, finance professionals gained control of most leading
corporations, and turned firms into diversified conglomerates that operated
internal capital markets. Since then, a new model of shareholder value
management, promoted by managers, institutional investors, and securities
analysts, has led firms to turn away from conglomeration, creating large
single-industry firms intent on maximizing stock performance (Davis,
Diekmann, & Tinsley, 1994; Dobbin & Zorn, 2005; Fligstein & Markowitz,
1993). These corporate-level organizational changes were promoted by
professional groups using the tools of social movements.
Another contingent of scholars studies how activist groups affect the social
and environmental policies of corporations. Soule (2009) calls the targeting
of corporations by social movements “private politics,” to distinguish it
from politics targeting the state. There are several explanations for the rise of
“private politics” at the end of the twentieth century. Economic concentration creates industry behemoths that are tempting targets, for leading firms
can influence the well-being of entire states and communities. Meanwhile,
political trends since the 1970s have resulted in weaker labor unions and
national regulatory agencies, making them less attractive targets for activists
(Prasad, 2006). In a political environment where state intervention appears
to be declining, activists may view the state as a less attractive political target
than the corporation (King & Pearce, 2010).
While social activism by corporate outsiders can negatively affect stock
valuation and financial performance (King & Soule, 2007), activism by corporate insiders with formal contractual relationships to the firm can be even
more effective. For example, Vasi and King (2012) show that environmental
activism by shareholders can increase the perceived environmental risks
associated with corporate policies and thus negatively affect corporate financial performance. Activism by outsiders, on the other hand, relies on appeals
to consumers. Consumer movements have resulted in the creation of markets
for new products such as grass-fed beef (Weber, Heinze, & DeSoucey, 2008)
and of new market niches for socially responsible corporations (Vogel, 2005).
While some shareholder activism is directed toward ethics, the lion’s share
aims to maximize financial results (Davis & Thompson, 1994; Dobbin & Jung,

Institutions and the Economy

7

2010). As institutional investors unafraid to challenge management come
to control an increasing concentration of shares, the costs of public ownership have grown from the perspective of management (cf. Goldstein, 2012).
Executives have responded by cutting ties to investors: in 2009, the United
States had half as many publicly traded domestic corporations as it did in
1997 (Davis, 2011). Meanwhile, executives of publicly held firms have become
preoccupied with financial markets and share price. Davis (2009) heralds
the death of the corporation as a social institution, for the firm is no longer
viewed as a permanent entity offering a stable local economy to its community and lifelong benefits to employees. And again, these trends have been
accelerated by the arguments of financial economists and law-and-economy
scholars, who theorize the corporation as a “nexus of contracts” between
owners, managers, customers, workers, and suppliers, with each group trying to maximize its claim to the firm’s revenue streams (Davis, 2005). A central challenge for economic sociologists is to understand how the corporate
form, social movement, and state adapt to one another as “financial capitalism” evolves.
MORAL AND CULTURAL INSTITUTIONS AND THE ECONOMY
Early work on culture and the economy focused on the values necessary
to “commoditize” objects as a precondition to the emergence of markets.
For example, changes in cultural attitudes toward life and death themselves
allowed for the emergence of a market for life insurance (Zelizer 1983). More
recent changes in attitudes toward financial speculation have contributed to
the emergence of secondary markets in life insurance, wherein the terminally
ill sell their policies to third-party investors (Quinn, 2008).
Scholars have also investigated cultural underpinnings of economic life
at the organizational and individual levels. This movement represents a
cultural complement to Granovetter’s (1985) structurally oriented concept
of embeddedness. The foundational tenet is that intimate relationships are
neither incompatible with exchange relationships nor reducible to them.
Rather, Zelizer (2005, p. 288) asks “what sorts of economic transactions
match which intimate relations?” This question set the stage for studies
of “relational work” investigating the social processes behind forging and
maintaining exchange relationships (Zelizer, 2012). Healy (2006) examines how organizations manage organ donors’ understandings of their
donations—as altruistic gifts or self-interested exchanges—while Almeling
(2011) shows that gender norms affect the relationship between sperm and
egg donors and organizational intermediaries. Both works show that the fit
between exchange transactions and intimate relations pattern the exchange
of goods.

8

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

While this literature has an obvious affinity with the sordid and the sacred
as objects of research, nothing limits relational work to dealing with human
byproducts. For example, Bandelj (2009) shows that post-socialist Europe
used relational work to signal demand for foreign direct investment (FDI).
Establishing FDI as a legitimate form of economic activity was more successful than simply passing regulations favorable to FDI. Bandelj’s (2009, p. 128)
work elucidates the “social foundations of macroeconomic trends beyond the
instrumental considerations of risk and return.”
Whitford (2005) uses relational work to investigate the weakening of firm
boundaries and the move toward network modes of production (Powell,
1990). Many classics in the embeddedness literature (e.g., Uzzi, 1996) work
from the assumption that interorganizational relationships are defined either
by “logics of embeddedness” or “logics of the market.” Whitford shows that
interfirm relationships are often a confusing mix of these logics: they may
embody fine-grained exchange of information and mutual distrust. Maintaining these relationships depends on the ability of partners to define the
relationship as mutually beneficial, or better yet, as irreplaceable. The character of interorganizational relationships, then, is not simply a function of the
uncertainty inherent in markets, where “embedded” relationships are valued
as hedges against opportunism. Rather, the character of economic exchange
is subject to negotiation through “relational work.”
Research attentive to the quality of economic relationships is timely, both
because of the criticism that has been leveled at overly structural interpretations of embeddedness (Krippner, 2002; Krippner & Alvarez, 2007) and
because of the move away from the massive, hierarchical corporation and
toward network modes of production, as discussed earlier (Davis, 2009).
CONCLUSION AND FUTURE DIRECTIONS
Research in sociology, political science, and economics has established
that institutions matter to the operation of the economy. Further, economic
sociologists have shown that universal economic laws do not push national
economies and corporate systems toward any one model, but rather permit
a multitude of economic arrangements. Unable to rely on deterministic
theories of convergence, economic sociologists face the challenge of explaining the causes and patterns of change in economic systems over time. We
have shown that the recent trend in economic sociology is to address this
challenge.
One group of scholars treats institutional change as a product of the
diffusion of regulatory institutions across national boundaries. While this
perspective may seem to privilege international networks as the locus
of institutional change, studies point to the roles of power and coercion,

Institutions and the Economy

9

cognition and learning in diffusion (Simmons, Dobbin, & Garrett, 2008).
Furthermore, this perspective may seem to predict convergence of economic
forms. However, because regulatory regimes are necessarily translated as
they become enmeshed in national cultures and polities, convergence may
be superficial at best (Halliday & Carruthers, 2009).
Another group treats economic change as a product of the increasing
preeminence of the discipline of economics among policy makers and
corporate leaders. At first glance, this perspective too might seem to predict
cross-national convergence of economies, but institutional scholars have
shown otherwise. Economic theory manifests itself differently as it encounters divergent institutional arrangements (Weir & Skocpol, 1985) and it must
be translated as it encounters different cultures (Fourcade, 2010). It is not
surprising, then, that economic theory is used to justify a range of different,
often contradictory, policies (Jabko, 2006).
A third group of researchers treat changes in economic and institutional
fields as the result of activism by entrepreneurs and social movement organizations. They explore how powerful actors shape institutions in order to
achieve their goals, but power alone does not explain outcomes. Rather, cognitive processes determine both the goals of actors and the success of strategies, while networks are important sources of resources and innovations. The
“markets as politics” perspective treats markets as one instance of the larger
category of “social action fields,” and pays special attention to the interactions of multiple strategic actors (Fligstein & McAdam, 2012).
A final line of research sees economic life as enabled and constrained by the
values and understandings that emerge from interpersonal and interorganizational relationships. Researchers from this perspective have documented
that patterns of economic behavior rise and fall in tandem with cultural values. Nonetheless, this perspective is not limited to cognitive explanations.
Researchers have shown that actors can influence the relative salience of values (Healy, 2006; Quinn, 2008), while others have focused on how cultural
work determines the character of exchange relationships (Almeling, 2011;
Whitford, 2005).
These perspectives do not exhaust the types of institutional change.
Future research will identify new mechanisms behind institutional change
and strengthen our understanding of how institutional change affects
economic life.
REFERENCES
Almeling, R. (2011). Sex cells: The medical market for eggs and sperm. Berkeley: University of California Press.
Bandelj, N. (2009). The global economy as instituted process: The case of Central and
Eastern Europe. American Sociological Review, 74(1), 128–149.

10

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Block, F., & Evans, P. (2005). The state and the economy. In N. Smelser & R. Swedberg
(Eds.), The handbook of economic sociology (pp. 505–526). Princeton, NJ: Princeton
University Press.
Campbell, J. L. (1998). Institutional analysis and the role of ideas in political economy.
Theory and Society, 27, 377–409.
Clark, B. R. (1960). The open-door colleges: A case study. New York, NY: McGraw-Hill.
Commons, J. R. (1924). Legal foundations of capitalism. New York, NY: Macmillan.
Czarniawska, B., & Sevon, G. (Eds.) (1996). Translating organizational change. Berlin,
Germany: Walter de Gruyer & Co.
Davis, G. F. (2005). New directions in corporate governance. Annual Review of Sociology, 31, 143–162.
Davis, G. F. (2009). Managed by the markets: How finance reshaped America. Oxford, England: Oxford University Press.
Davis, G. F. (2011). The twilight of the Berle and Means Corporation. Seattle University
Law Review, 34, 1121–1138.
Davis, G. F., Diekmann, K. A., & Tinsley, C. H. (1994). The decline and fall of the
Conglomerate Firm in the 1980s: The deinstitutionalization of an organizational
form. American Sociological Review, 59, 547–570.
Davis, G. F., & Thompson, T. A. (1994). A social movement perspective on corporate
control. Administrative Science Quarterly, 39(1), 141–173.
DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological
Review, 48, 147–160.
Djelic, M.-L. (1998). Exporting the American Model: The postwar transformation of European Business. New York, NY: Oxford University Press.
Dobbin, F. (1994). Forging industrial policy: The United States, Britain, and France in the
Railway Age. New York, NY: Cambridge University Press.
Dobbin, F., & Jung, J. (2010). The Misapplication of Mr. Michael Jensen: How agency
theory brought down the economy and why it might again. In M. Lounsbury & P.
M. Hirsch (Eds.), Markets on trial: The economic sociology of the U.S. financial crisis:
Part B. Research in the sociology of organizations (Vol. 30, pp. 29–64). Bingley, England:
Emerald Group Publishing Limited.
Dobbin, F., & Zorn, D. (2005). Corporate malfeasance and the myth of shareholder
value. Political Power and Social Theory, 17, 179–198.
Evans, P. (1995). Embedded autonomy: States and industrial transformation. Princeton,
NJ: Princeton University Press.
Fligstein, N. (1990). The transformation of corporate control. Cambridge, MA: Harvard
University Press.
Fligstein, N., & Markowitz, L. (1993). Financial reorganization of American Corporations in the 1980s. In W. J. Wilson (Ed.), Sociology and the public agenda (pp. 185–206).
Beverly Hills, CA: Sage Publications.
Fligstein, N., & McAdam, D. (2012). A theory of fields. New York, NY: Oxford University Press.
Fourcade, M. (2010). Economists and societies: Discipline and profession in the United
States, Britain, and France, 1890s to 1990s. Princeton, NJ: Princeton University Press.

Institutions and the Economy

11

Goldstein, A. (2012). Revenge of the managers: Labor cost-cutting and the paradoxical resurgence of managerialism in the shareholder value era, 1984 to 2001.
American Sociological Review, 77(2), 268–294.
Granovetter, M. (1985). Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 91, 481–510.
Guillén, M. F. (2001). The limits of convergence: Globalization and organizational change
in Argentina, South Korea, and Spain. Princeton, NJ: Princeton University Press.
Hall, P., & Soskice, D. (2001). Varieties of capitalism: The institutional foundations of comparative advantage. New York, NY: Oxford University Press.
Hall, P. A., & Taylor, R. C. R. (1996). Political science and the three new institutionalisms. Political Studies, 44, 936–958.
Halliday, T. C., & Carruthers, B. G. (2009). Bankrupt: Global lawmaking and systemic
financial crisis. Stanford, CA: Stanford University Press.
Hamilton, G. G., & Biggart, N. W. (1988). Market, culture, and authority: A comparative analysis of management and organization in the far east. American Journal of
Sociology, 94(Supplement), S52–S94.
Healy, K. (2006). Last best gifts: Altruism and the market for human blood and organs.
Chicago, IL: University of Chicago Press.
Jabko, N. (2006). Playing the market: A political strategy for Uniting Europe, 2985–2005.
Ithaca, NY: Cornell University Press.
King, B., & Pearce, N. A. (2010). The contentiousness of markets: Politics, social movements, and institutional change in markets. Annual Review of Sociology, 36, 249–267.
King, B., & Soule, S. A. (2007). Social movements as extra-institutional entrepreneurs:
The effect of protests on stock returns. Administrative Science Quarterly, 52, 413–442.
Krasner, S. D. (1984). Approaches to the state: Alternative conceptions and historical
dynamics. Comparative Politics, 17, 223–246.
Krippner, G. (2002). The elusive market: Embeddedness and the paradigm of economic sociology. Theory and Society, 30, 775–810.
Krippner, G. (2012). Capitalizing on crisis: The political origins of the rise of finance. Cambridge, MA: Harvard University Press.
Krippner, G., & Alvarez, A. (2007). Embeddedness and the intellectual projects of
economic sociology. Annual Review of Sociology, 33, 219–240.
Kristensen, P. H. (1996). Variations in the nature of the firm in Europe. In R. Whitley
& P. H. Kristensen (Eds.), The changing European Firm: Limits to convergence (pp.
1–39). London, England: Routledge.
Lee, C. K., & Strang, D. (2006). The international diffusion of public-sector downsizing: Network emulation and theory-driven learning. International Organization,
60(4), 883–909.
March, J. G., & Simon, H. A. (1958). Organizations. New York, England: Wiley.
Martin, C. J., & Swank, D. (2004). Does the organization of capital matter? Employers
and active labor market policy at the national and firm levels. American Political
Science Review, 98(4), 593–611.
Meyer, J. W., & Rowan, B. (1977). Institutionalized organizations: Formal structure
as myth and ceremony. American Journal of Sociology, 83(2), 340–363.

12

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Moore, B., Jr. (1966). The social origins of dictatorship and democracy. Boston, MA: Beacon.
North, D. (1990). Institutions, institutional change and economic performance. New York,
NY: Cambridge University Press.
Perrow, C. (2002). Organizing America: Wealth power and the origins of corporate capitalism. Princeton, NJ: Princeton University Press.
Pierson, P. (1994). Dismantling the welfare state? Reagan, Thatcher, and the Politics of
Retrenchment. Cambridge, England: Cambridge University Press.
Powell, W. W. (1990). Neither market nor hierarchy: Network forms of organization.
In L. L. Cummings & B. Shaw (Eds.), Research in organizational behavior (Vol. 12, pp.
295–336). Thousand Oaks, CA: Sage.
Prasad, M. (2006). The politics of free markets: The rise of neoliberal economic policies in
Britain, France, Germany, and the United States. Chicago, IL: University of Chicago
Press.
Prasad, M. (2012). The land of too much: American abundance and the Paradox of Poverty.
Cambridge, MA: Harvard University Press.
Quinn, S. (2008). The transformation of morals in markets: Death, benefits, and
the exchange of life insurance policies. American Journal of Sociology, 114(3),
738–780.
Roy, W. (1997). Socializing capital: The rise of the large industrial corporation in America.
Princeton, NJ: Princeton University Press.
Scott, W. R. (2001). Institutions and organizations. Thousand Oaks, CA: Sage.
Selznick, P. (1949). TVA and the grass roots. Berkeley, CA: University of California
Press.
Selznick, P. (1957). Leadership in administration: A sociological interpretation. New York,
NY: Harper and Row.
Shepsle, K. (2005). Rational choice institutionalism. Cambridge, MA: Harvard University Press.
Simmons, B., Dobbin, F., & Garrett, G. (2008). The global diffusion of markets and democracy. Cambridge, England: Cambridge University Press.
Skocpol, T. (1979). States and social revolutions: A comparative analysis of France, Russia,
and China. New York, NY: Cambridge University Press.
Soule, S. A. (2009). Contention and corporate social responsibility. New York, NY: Cambridge University Press.
Steensland, B. (2008). The failed welfare revolution: America’s struggle over guaranteed
income policy. Princeton, NJ: Princeton University Press.
Steinmo, S., Thelen, K., & Longstreth, F. (Eds.) (1992). Structuring politics: Historical
institutionalism in comparative analysis. New York, NY: Cambridge University Press.
Strang, D., & Meyer, J. W. (1993). Institutional conditions for diffusion. Theory and
Society, 22(4), 487–511.
Thelen, K. (2004). How institutions evolve: The political economy of skills in Germany,
Britain, the United States, and Japan. New York, NY: Cambridge University Press.
Tsebelis, G. (2002). Veto players: How political institutions work. Princeton, NJ: Princeton
University Press.

Institutions and the Economy

13

Uzzi, B. (1996). The sources and consequences of embeddedness for the economic
performance of organizations: The network effect. American Sociological Review,
61(4), 674–698.
Vasi, I. B., & King, B. (2012). Social movements, risk perceptions, and economic outcomes: The effect of primary and secondary stakeholder activism on firms’ perceived environmental risk and financial performance. American Sociological Review,
77(4), 573–596.
Veblen, T. (1904). The theory of business enterprise. New York, NY: Scribner’s.
Vogel, D. (2005). The market for virtue: The potential and limits of corporate social responsibility. Washington, DC: Brookings Institute Press.
Weber, K., Heinze, K., & DeSoucey, M. (2008). Forage for thought: Mobilizing codes
in the movement for grass-fed meat and dairy products. Administrative Science
Quarterly, 53, 529–567.
Weir, M., & Skocpol, T. (1985). State structures and the possibilities for ’Keynesian’
responses to the great depression in Sweden, Britain, and the United States. In
P. Evans, D. Rueschemeyer & T. Skocpol (Eds.), Bringing the state back in (pp.
107–163). New York, NY: Cambridge University Press.
Whitford, J. (2005). The new old economy: Networks, institutions, and the organizational transformation of American manufacturing. Oxford, England: Oxford University Press.
Whitley, R. (1992). Business systems in East Asia: Firms, markets, and societies. London,
England: Sage.
Williamson, O. E. (1985). The economic institutions of capitalism. New York, NY: Free
Press.
Yonay, Y. (1998). The struggle over the soul of economics: Institutionalist and neoclassical
economists in American between the wars. Princeton, NJ: Princeton University Press.
Zald, M. N., & Denton, P. (1963). From evangelism to general service: The transformation of the YMCA. Administrative Science Quarterly, 8, 214–234.
Zelizer, V. (2005). The purchase of intimacy. Princeton, NJ: Princeton University Press.
Zelizer, V. (2012). How I became a relational economic sociologist and what does that
mean? Politics and Society, 40(2), 145–174.
Zelizer, V. A. (1983). Morals and markets: The development of life insurance in the United
States. New Brunswick, NJ: Transaction Publishers.

FURTHER READING
Biggart, N. W. (2001). Introduction. In N. W. Biggart (Ed.), Economic sociology: A reader.
Oxford, England: Blackwell.
Campbell, J. L. (2004). Institutional change and globalization. Princeton, NJ: Princeton
University Press.
Dobbin, F. (Ed.) (2004). The sociology of the economy. New York, NY: Russell Sage Foundation.
Dobbin, F. (Ed.) (2004). The new economic sociology: A reader. Princeton University
Press: Princeton, NJ.

14

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Granovetter, M., & Swedberg, R. (Eds.) (2001). The sociology of economic life. Boulder,
CO: Westview Press.
Scott, W. R. (2007). Institutions and organizations: Ideas and interests (3rd ed.). Los Angeles, CA: Sage.
Smelser, N. J., & Swedberg, R. (Eds.) (2004). The handbook of economic sociology. Princeton, NJ: Princeton University Press and Russell Sage Foundation.

CARL GERSHENSON SHORT BIOGRAPHY
Carl Gershenson is a doctoral student and National Science Foundation Graduate Research Fellow in the Sociology Department at Harvard
University. His research focuses on the origins of the American business
corporation.
FRANK DOBBIN SHORT BIOGRAPHY
Frank Dobbin is Professor of Sociology at Harvard. His Forging Industrial
Policy: The United States, Britain, and France in the Railway Age (Cambridge,
1994) traces the roots of contemporary industrial policy approaches to the
institutional logics of political order in different countries. The New Economic
Sociology: An Anthology (Princeton, 2004), ties modern economic sociology to
classical sociological theory. The Sociology of the Economy (Russell Sage Foundation 2004) showcases the range of the new economic sociology. Inventing
Equal Opportunity (Princeton, 2009) explores how corporate human resources
professionals defined what discrimination meant under the Civil Rights Act.

RELATED ESSAYS
Party Organizations’ Electioneering Arms Race (Political Science), John H.
Aldrich and Jeffrey D. Grynaviski
Global Economic Networks (Sociology), Nina Bandelj et al.
The Public Nature of Private Property (Sociology), Debbie Becher
Returns to Education in Different Labor Market Contexts (Sociology), Klaus
Schöemann and Rolf Becker
Inefficiencies in Health Care Provision (Economics), James F. Burgess et al.
Neoliberalism (Sociology), Miguel Angel Centeno and Joseph N. Cohen
Domestic Institutions and International Conflict (Political Science), Giacomo
Chiozza
Elites (Sociology), Johan S. G. Chu and Mark S. Mizruchi
Trust and Economic Organization (Sociology), Karen S. Cook and Bogdan
State

Institutions and the Economy

15

Stability and Change in Corporate Governance (Sociology), Gerald F. Davis
and Johan S. G. Chu
Financialization of the US Economy (Sociology), Gerald (Jerry) F. Davis and
Suntae Kim
Global Income Inequality (Sociology), Glenn Firebaugh
Interdependence, Development, and Interstate Conflict (Political Science),
Erik Gartzke
Labor Market Instability, Labor Market Entry and Early Career Development
(Sociology), Michael Gebel
Organizational Populations and Fields (Sociology), Heather A. Haveman and
Daniel N. Kluttz
Modeling Coal and Natural Gas Markets (Economics), Franziska Holz
Family Formation in Times of Labor Market Insecurities (Sociology), Johannes
Huinink
Innovation (Economics), Adam B. Jaffe
Search and Learning in Markets (Economics), Philipp Kircher
Transformation of the Employment Relationship (Sociology), Arne L. Kalleberg and Peter V. Marsden
Domestic Political Institutions and Alliance Politics (Political Science),
Michaela Mattes
Rationing of Health Care (Sociology), David Mechanic
Organizations and the Production of Systemic Risk (Sociology), Charles
Perrow
Economics and Culture (Economics), Gérard Roland
Sociology of Entrepreneurship (Sociology), Martin Ruef
Impact of Limited Education on Employment Prospects in Advanced
Economies (Sociology), Heike Solga
The Institutional Logics Perspective (Sociology), Patricia H. Thornton et al.



Institutions and the Economy
CARL GERSHENSON and FRANK DOBBIN

Abstract
Sociology, political science, and economics have undergone parallel revolutions
since the late 1970s, following on the heels of the behavioral revolution of the
1950s and 1960s. Four distinct institutional paradigms have emerged: sociological
institutionalism, rational choice institutionalism in political science, historical institutionalism in the same discipline, and new institutional economics. Sociologists
argue that economic institutions—which encompass paradigms, conventions,
rules, and regulations—shape modern behavior. National institutional differences
produce stable patterns of economic behavior within countries, but institutions
themselves change over time. Four recent trends in sociology are reviewed: studies
of the global spread of regulatory institutions; studies of the use of economic
theories to support policy design and economic conventions; studies of market
actors as social movements promoting economic change; and studies of the moral
and cultural underpinnings of the economy.

INTRODUCTION
Sociologists, political scientists, and economists have devoted a great deal of
attention to the role of institutions—which encompass paradigms, conventions, rules, and regulations—in shaping economic activity, and have moved
away from treating the individual as the central determinant of social, political, and economic outcomes. Institutionalists explain continuity and change
in economic life as a consequence of the structure of institutions. They also
study how institutions shape preferences, cognition, and behavior, which in
turn influence new political, economic, and social patterns.
The first wave of sociological institutionalism focused on how policies and
practices within firms gained a life of their own, becoming “institutionalized.”
Zald and Denton (1963), Selznick (1949), and Clark (1960) showed that individuals become cognitively attached to certain policies and practices, seeing
them as vital to organizational success. They also build up interests around
existing institutions, such that they defend those institutions against challenge.
Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.

1

2

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

The second wave of sociological institutionalism used social constructionism to explore how new organizational institutions (policies, paradigms,
structures) arise among organizational fields comprising firms, regulators,
and professional groups (DiMaggio & Powell, 1983; Meyer & Rowan, 1977).
The optimal means for achieving efficiency and equity are socially negotiated, although those means become objectified in the minds of modern
actors, who come to believe them to be determined by transcendental
economic and managerial laws and precepts. That paradigm has expanded
its purview to national markets and political institutions (Dobbin, 1994;
Fligstein, 1990).
In political science, two versions of institutional theory have taken hold. In
the rational choice version, institutions shape the preferences of individuals
in the political system. Broadly speaking, institutions conceived as regulatory
and political rules are developed and persist to reduce political and economic
uncertainty (Shepsle, 2005). At the national level, decision-making institutions in the political realm influence the economic preferences of different
groups in society, and they determine the policy outcomes of negotiations
and of parliamentary and congressional votes. For example, systems containing veto points may prevent groups from compromising (Tsebelis, 2002),
while other institutional arrangements promote compromise. Rational choice
institutionalists conceive of institutions as rules of the market, making markets predictable and giving them structure. They also conceive of institutions
as rules of political exchange, making policy decisions predictable and facilitating strategic action.
In the historical version of political science institutionalism, national political institutions gain inertia and become resistant to change (Moore, 1966;
Skocpol, 1979). Inertia comes not only from the stability of formal rules but
also from the effects of rules and structures on how people conceive of society, polity, and the market (Campbell, 1998; Hall & Taylor, 1996; Steinmo,
Thelen, & Longstreth, 1992). Broad policy institutions, according to Krasner
(1984), tend to persist in equilibrium until a shock leads to the creation of
new institutions. Thelen (2004), by contrast, describes institutions as changing incrementally, so that a revolution can come about through small steps.
Political systems are path-dependent, such that an early policy choice determines the policy options available at a later date (Pierson, 1994).
Institutionalist economists, who predate the dominance of the neoclassical
model of economic behavior (Yonay, 1998), argue that economic action
is shaped by social institutions and evolves over time (Veblen, 1904).
Commons (1924) viewed institutions as offering collective control over
individual behavior and thought careful design of public policy could steer
individual behavior. After the rise of the individualistic, neoclassical model,
Williamson (1985) and North (1990) articulated a more rationalist approach

Institutions and the Economy

3

to institutions. Williamson (1985) presents the corporation as an institution
that reduces transaction costs by “internalizing” them, rather than leaving
all transactions to the market. He later extended this approach to economic
institutions more broadly, emphasizing that institutions allow economic
actors to minimize transaction costs.
INSTITUTIONS AND ECONOMIC SOCIOLOGY
For sociologists, institutions play a fundamental role in the economy. For
economists, institutions allow market actors to reduce transaction costs,
whereas for economic sociologists, this puts the cart before the horse. Without social and regulatory institutions, there would be no market activity,
and thus no transaction costs to speak of. Institutions are constitutive of the
economy (Block & Evans, 2005). All economic activity is embedded in social
institutions (Krippner & Alvarez, 2007).
Because institutions, or social conventions, create the framework within
which economic activity is undertaken (Scott 2001), sociologists do not see
the regularities that seem to shape economic life as either invariant or exogenous to economic, political, and social processes. Rather, while it may seem
that the economic world is governed by eternal law-like verities, economic
laws themselves are social products that demand explanation. Institutional
explanations of economic life therefore cannot rely on universal covering
laws, but rather must point to social factors such as culture, socially generated cognition, and power.
In culturally oriented theories, regularities in economic life are only mistaken for laws, perhaps because they are formalized and diffused through
expert knowledge networks comprising economists (Fourcade, 2010), top
executives (Fligstein, 1990), consultants (Strang & Meyer, 1993), and public
policymakers (Roy, 1997). Regularities in ways of thinking, acting, and
seeing the world become part of the taken-for-granted cultural inheritance
of a nation, and solutions to new problems are found in the solutions to
old problems (Dobbin, 1994). Just as early organizational institutionalists
argued that organizational practices become imbued with meaning by
participants, and come to be seen as singular means for achieving particular
goals (Selznick, 1957); and just as organizational sociologists argue that
existing corporate policies constrain the solutions managers can envision to
new problems (March & Simon, 1958); institutionalists studying the wider
economy and polity argue that existing policies and practices constrain the
range of imaginable policy options for the future (Hall & Soskice, 2001;
Whitley, 1992).
Power theorists argue that regularities prevail in economic life because the
powerful shape economic institutions to their liking—for example, favoring

4

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

large limited-liability corporations to networks of smaller partnerships (Perrow, 2002). Power and institutions play supporting roles at different points
in the process of institutionalization, as Roy (1997) illustrates in his work on
the history of the firm. For Roy, power explains the creation of legal institutions that favor certain interests, but when these institutions become taken
for granted they remain influential after those who promoted them are gone.
They persist because people come to see them as natural and rational.
Economic sociologists use cross-national research to highlight the importance of institutions (Kristensen, 1996; Whitley, 1992). By showing that countries with widely different institutions can achieve similar levels of growth,
economic sociologists and “Varieties of Capitalism” scholars contend that
there is no single optimal set of institutions that all countries are destined
to converge toward (e.g., Hall & Soskice, 2001; Hamilton & Biggart, 1988).
Guillén (2001) argues that institutions confer comparative advantages that
determine which industries can prosper in a given nation. More generally,
institutions that allow states to remain autonomous from business interests
without losing touch with those interests’ legitimate needs tend to facilitate
economic development (Evans 1995).
Where are institutional studies in economic sociology headed? Early studies often focused on ways in which institutions reinforced existing social,
political, and economic patterns, whereas the recent trend has been to examine temporal changes in institutions and their implications for economic systems. We discuss four trends in institutional analysis: studies of (i) the global
diffusion of regulatory institutions, (ii) the use of economic theory to support
institutional choices, (iii) market actors as social movement organizations,
and (iv) how moral and cultural institutions shape the economy.
THE GLOBAL DIFFUSION OF REGULATORY INSTITUTIONS
Studies documenting the diffusion of regulatory institutions across borders
often describe the effects of the world polity and of neighboring countries
on national institutional arrangements. Thus, Lee and Strang (2006) chart
the diffusion of British-style public-sector downsizing, following Thatcher’s
experiments. Over time, many countries cut the size of government. Learning from the experiences of others was mediated by neoliberal theory, which
defined downsizing as an effective means of promoting growth and balancing budgets. Countries only took the lesson from previous downsizers when
those lessons lined up with theory. In periods when previous downsizings
failed, they ignored evidence inconsistent with theory.
Yet other studies document that in the process of diffusion, regulatory
institutions can be significantly altered, or “translated” (Czarniawska &
Sevon, 1996). Djelic (1998) examines the diffusion of the US corporate form

Institutions and the Economy

5

to Europe in the years after World War II, finding that local institutions and
traditions determined whether that model would be imported, rebuffed, or
significantly altered to fit local traditions. Halliday and Carruthers (2009)
show that a global consensus on the appropriate corporate bankruptcy
institutions emerged following recent crises and then diffused widely to
countries at different levels of development. But many countries so altered
the international conventions in the process of implementation that their
policies were unrecognizable, while others adopted the policies in toto only
to disable them in the process of implementation.
THE USE OF ECONOMIC THEORY TO SUPPORT INSTITUTIONAL CHOICES
In recent decades, economic theory has played an increasingly important role
in justifying institutional choices of all sorts, from welfare policy (Steensland, 2008) and labor market policy (Martin & Swank, 2004; Thelen, 2004)
to financial policy (Krippner, 2012). Particularly striking is the application
of market logics in arenas that were thought to be subject to alternate logics, as in the case of social welfare (Pierson, 1994). Unemployment insurance
has been rebranded as a part of “active labor market” policies, and the logic
of provision for the needy has been displaced by a logic of incentivizing
the unemployed to seek work. Clinton’s 1996 welfare reform legislation was
framed as an effort to reinforce market mechanisms, with a view to unleashing economic forces to trim the welfare rolls.
Studies of public policies have shown that policymakers use economic
theory strategically and opportunistically to justify their favored policy
choices. For instance, Jabko (2006) shows that European Union regulators
use the rhetoric of economic theory to support a wide range of policies that
depend on very different regulatory logics. “Marketization” can mean just
about anything. Krippner (2012) shows, by contrast, that the “deregulation”
of US financial markets resulted not from a master economic plan but from
a series of decisions made for political expediency. Designed to soften the
blow of recessions by controlling interest rates, these decisions were later
rationalized with the rhetoric of deregulation.
Prasad (2012) shows that laissez faire rhetoric, as applied to the deregulation of US mortgage markets, conceals a more complicated reality. Despite
the story that the United States had a weak welfare state, since the 1940s a
system of mortgage supports has subsidized the middle class and produced
countercyclical Keynesian mortgage spending.

6

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

MARKET ACTORS AS SOCIAL MOVEMENT ORGANIZATIONS
A number of scholars treat markets as instances of the more general concept of social fields (Fligstein & McAdam, 2012), showing that professions
and social movements can alter economic institutions and activity. Thus, economic change may be precipitated by social movements as well as by market
forces.
Fligstein (1990) explores how groups of management professionals led
a social movement to change the structure and strategy of corporations.
After World War II, finance professionals gained control of most leading
corporations, and turned firms into diversified conglomerates that operated
internal capital markets. Since then, a new model of shareholder value
management, promoted by managers, institutional investors, and securities
analysts, has led firms to turn away from conglomeration, creating large
single-industry firms intent on maximizing stock performance (Davis,
Diekmann, & Tinsley, 1994; Dobbin & Zorn, 2005; Fligstein & Markowitz,
1993). These corporate-level organizational changes were promoted by
professional groups using the tools of social movements.
Another contingent of scholars studies how activist groups affect the social
and environmental policies of corporations. Soule (2009) calls the targeting
of corporations by social movements “private politics,” to distinguish it
from politics targeting the state. There are several explanations for the rise of
“private politics” at the end of the twentieth century. Economic concentration creates industry behemoths that are tempting targets, for leading firms
can influence the well-being of entire states and communities. Meanwhile,
political trends since the 1970s have resulted in weaker labor unions and
national regulatory agencies, making them less attractive targets for activists
(Prasad, 2006). In a political environment where state intervention appears
to be declining, activists may view the state as a less attractive political target
than the corporation (King & Pearce, 2010).
While social activism by corporate outsiders can negatively affect stock
valuation and financial performance (King & Soule, 2007), activism by corporate insiders with formal contractual relationships to the firm can be even
more effective. For example, Vasi and King (2012) show that environmental
activism by shareholders can increase the perceived environmental risks
associated with corporate policies and thus negatively affect corporate financial performance. Activism by outsiders, on the other hand, relies on appeals
to consumers. Consumer movements have resulted in the creation of markets
for new products such as grass-fed beef (Weber, Heinze, & DeSoucey, 2008)
and of new market niches for socially responsible corporations (Vogel, 2005).
While some shareholder activism is directed toward ethics, the lion’s share
aims to maximize financial results (Davis & Thompson, 1994; Dobbin & Jung,

Institutions and the Economy

7

2010). As institutional investors unafraid to challenge management come
to control an increasing concentration of shares, the costs of public ownership have grown from the perspective of management (cf. Goldstein, 2012).
Executives have responded by cutting ties to investors: in 2009, the United
States had half as many publicly traded domestic corporations as it did in
1997 (Davis, 2011). Meanwhile, executives of publicly held firms have become
preoccupied with financial markets and share price. Davis (2009) heralds
the death of the corporation as a social institution, for the firm is no longer
viewed as a permanent entity offering a stable local economy to its community and lifelong benefits to employees. And again, these trends have been
accelerated by the arguments of financial economists and law-and-economy
scholars, who theorize the corporation as a “nexus of contracts” between
owners, managers, customers, workers, and suppliers, with each group trying to maximize its claim to the firm’s revenue streams (Davis, 2005). A central challenge for economic sociologists is to understand how the corporate
form, social movement, and state adapt to one another as “financial capitalism” evolves.
MORAL AND CULTURAL INSTITUTIONS AND THE ECONOMY
Early work on culture and the economy focused on the values necessary
to “commoditize” objects as a precondition to the emergence of markets.
For example, changes in cultural attitudes toward life and death themselves
allowed for the emergence of a market for life insurance (Zelizer 1983). More
recent changes in attitudes toward financial speculation have contributed to
the emergence of secondary markets in life insurance, wherein the terminally
ill sell their policies to third-party investors (Quinn, 2008).
Scholars have also investigated cultural underpinnings of economic life
at the organizational and individual levels. This movement represents a
cultural complement to Granovetter’s (1985) structurally oriented concept
of embeddedness. The foundational tenet is that intimate relationships are
neither incompatible with exchange relationships nor reducible to them.
Rather, Zelizer (2005, p. 288) asks “what sorts of economic transactions
match which intimate relations?” This question set the stage for studies
of “relational work” investigating the social processes behind forging and
maintaining exchange relationships (Zelizer, 2012). Healy (2006) examines how organizations manage organ donors’ understandings of their
donations—as altruistic gifts or self-interested exchanges—while Almeling
(2011) shows that gender norms affect the relationship between sperm and
egg donors and organizational intermediaries. Both works show that the fit
between exchange transactions and intimate relations pattern the exchange
of goods.

8

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

While this literature has an obvious affinity with the sordid and the sacred
as objects of research, nothing limits relational work to dealing with human
byproducts. For example, Bandelj (2009) shows that post-socialist Europe
used relational work to signal demand for foreign direct investment (FDI).
Establishing FDI as a legitimate form of economic activity was more successful than simply passing regulations favorable to FDI. Bandelj’s (2009, p. 128)
work elucidates the “social foundations of macroeconomic trends beyond the
instrumental considerations of risk and return.”
Whitford (2005) uses relational work to investigate the weakening of firm
boundaries and the move toward network modes of production (Powell,
1990). Many classics in the embeddedness literature (e.g., Uzzi, 1996) work
from the assumption that interorganizational relationships are defined either
by “logics of embeddedness” or “logics of the market.” Whitford shows that
interfirm relationships are often a confusing mix of these logics: they may
embody fine-grained exchange of information and mutual distrust. Maintaining these relationships depends on the ability of partners to define the
relationship as mutually beneficial, or better yet, as irreplaceable. The character of interorganizational relationships, then, is not simply a function of the
uncertainty inherent in markets, where “embedded” relationships are valued
as hedges against opportunism. Rather, the character of economic exchange
is subject to negotiation through “relational work.”
Research attentive to the quality of economic relationships is timely, both
because of the criticism that has been leveled at overly structural interpretations of embeddedness (Krippner, 2002; Krippner & Alvarez, 2007) and
because of the move away from the massive, hierarchical corporation and
toward network modes of production, as discussed earlier (Davis, 2009).
CONCLUSION AND FUTURE DIRECTIONS
Research in sociology, political science, and economics has established
that institutions matter to the operation of the economy. Further, economic
sociologists have shown that universal economic laws do not push national
economies and corporate systems toward any one model, but rather permit
a multitude of economic arrangements. Unable to rely on deterministic
theories of convergence, economic sociologists face the challenge of explaining the causes and patterns of change in economic systems over time. We
have shown that the recent trend in economic sociology is to address this
challenge.
One group of scholars treats institutional change as a product of the
diffusion of regulatory institutions across national boundaries. While this
perspective may seem to privilege international networks as the locus
of institutional change, studies point to the roles of power and coercion,

Institutions and the Economy

9

cognition and learning in diffusion (Simmons, Dobbin, & Garrett, 2008).
Furthermore, this perspective may seem to predict convergence of economic
forms. However, because regulatory regimes are necessarily translated as
they become enmeshed in national cultures and polities, convergence may
be superficial at best (Halliday & Carruthers, 2009).
Another group treats economic change as a product of the increasing
preeminence of the discipline of economics among policy makers and
corporate leaders. At first glance, this perspective too might seem to predict
cross-national convergence of economies, but institutional scholars have
shown otherwise. Economic theory manifests itself differently as it encounters divergent institutional arrangements (Weir & Skocpol, 1985) and it must
be translated as it encounters different cultures (Fourcade, 2010). It is not
surprising, then, that economic theory is used to justify a range of different,
often contradictory, policies (Jabko, 2006).
A third group of researchers treat changes in economic and institutional
fields as the result of activism by entrepreneurs and social movement organizations. They explore how powerful actors shape institutions in order to
achieve their goals, but power alone does not explain outcomes. Rather, cognitive processes determine both the goals of actors and the success of strategies, while networks are important sources of resources and innovations. The
“markets as politics” perspective treats markets as one instance of the larger
category of “social action fields,” and pays special attention to the interactions of multiple strategic actors (Fligstein & McAdam, 2012).
A final line of research sees economic life as enabled and constrained by the
values and understandings that emerge from interpersonal and interorganizational relationships. Researchers from this perspective have documented
that patterns of economic behavior rise and fall in tandem with cultural values. Nonetheless, this perspective is not limited to cognitive explanations.
Researchers have shown that actors can influence the relative salience of values (Healy, 2006; Quinn, 2008), while others have focused on how cultural
work determines the character of exchange relationships (Almeling, 2011;
Whitford, 2005).
These perspectives do not exhaust the types of institutional change.
Future research will identify new mechanisms behind institutional change
and strengthen our understanding of how institutional change affects
economic life.
REFERENCES
Almeling, R. (2011). Sex cells: The medical market for eggs and sperm. Berkeley: University of California Press.
Bandelj, N. (2009). The global economy as instituted process: The case of Central and
Eastern Europe. American Sociological Review, 74(1), 128–149.

10

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Block, F., & Evans, P. (2005). The state and the economy. In N. Smelser & R. Swedberg
(Eds.), The handbook of economic sociology (pp. 505–526). Princeton, NJ: Princeton
University Press.
Campbell, J. L. (1998). Institutional analysis and the role of ideas in political economy.
Theory and Society, 27, 377–409.
Clark, B. R. (1960). The open-door colleges: A case study. New York, NY: McGraw-Hill.
Commons, J. R. (1924). Legal foundations of capitalism. New York, NY: Macmillan.
Czarniawska, B., & Sevon, G. (Eds.) (1996). Translating organizational change. Berlin,
Germany: Walter de Gruyer & Co.
Davis, G. F. (2005). New directions in corporate governance. Annual Review of Sociology, 31, 143–162.
Davis, G. F. (2009). Managed by the markets: How finance reshaped America. Oxford, England: Oxford University Press.
Davis, G. F. (2011). The twilight of the Berle and Means Corporation. Seattle University
Law Review, 34, 1121–1138.
Davis, G. F., Diekmann, K. A., & Tinsley, C. H. (1994). The decline and fall of the
Conglomerate Firm in the 1980s: The deinstitutionalization of an organizational
form. American Sociological Review, 59, 547–570.
Davis, G. F., & Thompson, T. A. (1994). A social movement perspective on corporate
control. Administrative Science Quarterly, 39(1), 141–173.
DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological
Review, 48, 147–160.
Djelic, M.-L. (1998). Exporting the American Model: The postwar transformation of European Business. New York, NY: Oxford University Press.
Dobbin, F. (1994). Forging industrial policy: The United States, Britain, and France in the
Railway Age. New York, NY: Cambridge University Press.
Dobbin, F., & Jung, J. (2010). The Misapplication of Mr. Michael Jensen: How agency
theory brought down the economy and why it might again. In M. Lounsbury & P.
M. Hirsch (Eds.), Markets on trial: The economic sociology of the U.S. financial crisis:
Part B. Research in the sociology of organizations (Vol. 30, pp. 29–64). Bingley, England:
Emerald Group Publishing Limited.
Dobbin, F., & Zorn, D. (2005). Corporate malfeasance and the myth of shareholder
value. Political Power and Social Theory, 17, 179–198.
Evans, P. (1995). Embedded autonomy: States and industrial transformation. Princeton,
NJ: Princeton University Press.
Fligstein, N. (1990). The transformation of corporate control. Cambridge, MA: Harvard
University Press.
Fligstein, N., & Markowitz, L. (1993). Financial reorganization of American Corporations in the 1980s. In W. J. Wilson (Ed.), Sociology and the public agenda (pp. 185–206).
Beverly Hills, CA: Sage Publications.
Fligstein, N., & McAdam, D. (2012). A theory of fields. New York, NY: Oxford University Press.
Fourcade, M. (2010). Economists and societies: Discipline and profession in the United
States, Britain, and France, 1890s to 1990s. Princeton, NJ: Princeton University Press.

Institutions and the Economy

11

Goldstein, A. (2012). Revenge of the managers: Labor cost-cutting and the paradoxical resurgence of managerialism in the shareholder value era, 1984 to 2001.
American Sociological Review, 77(2), 268–294.
Granovetter, M. (1985). Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 91, 481–510.
Guillén, M. F. (2001). The limits of convergence: Globalization and organizational change
in Argentina, South Korea, and Spain. Princeton, NJ: Princeton University Press.
Hall, P., & Soskice, D. (2001). Varieties of capitalism: The institutional foundations of comparative advantage. New York, NY: Oxford University Press.
Hall, P. A., & Taylor, R. C. R. (1996). Political science and the three new institutionalisms. Political Studies, 44, 936–958.
Halliday, T. C., & Carruthers, B. G. (2009). Bankrupt: Global lawmaking and systemic
financial crisis. Stanford, CA: Stanford University Press.
Hamilton, G. G., & Biggart, N. W. (1988). Market, culture, and authority: A comparative analysis of management and organization in the far east. American Journal of
Sociology, 94(Supplement), S52–S94.
Healy, K. (2006). Last best gifts: Altruism and the market for human blood and organs.
Chicago, IL: University of Chicago Press.
Jabko, N. (2006). Playing the market: A political strategy for Uniting Europe, 2985–2005.
Ithaca, NY: Cornell University Press.
King, B., & Pearce, N. A. (2010). The contentiousness of markets: Politics, social movements, and institutional change in markets. Annual Review of Sociology, 36, 249–267.
King, B., & Soule, S. A. (2007). Social movements as extra-institutional entrepreneurs:
The effect of protests on stock returns. Administrative Science Quarterly, 52, 413–442.
Krasner, S. D. (1984). Approaches to the state: Alternative conceptions and historical
dynamics. Comparative Politics, 17, 223–246.
Krippner, G. (2002). The elusive market: Embeddedness and the paradigm of economic sociology. Theory and Society, 30, 775–810.
Krippner, G. (2012). Capitalizing on crisis: The political origins of the rise of finance. Cambridge, MA: Harvard University Press.
Krippner, G., & Alvarez, A. (2007). Embeddedness and the intellectual projects of
economic sociology. Annual Review of Sociology, 33, 219–240.
Kristensen, P. H. (1996). Variations in the nature of the firm in Europe. In R. Whitley
& P. H. Kristensen (Eds.), The changing European Firm: Limits to convergence (pp.
1–39). London, England: Routledge.
Lee, C. K., & Strang, D. (2006). The international diffusion of public-sector downsizing: Network emulation and theory-driven learning. International Organization,
60(4), 883–909.
March, J. G., & Simon, H. A. (1958). Organizations. New York, England: Wiley.
Martin, C. J., & Swank, D. (2004). Does the organization of capital matter? Employers
and active labor market policy at the national and firm levels. American Political
Science Review, 98(4), 593–611.
Meyer, J. W., & Rowan, B. (1977). Institutionalized organizations: Formal structure
as myth and ceremony. American Journal of Sociology, 83(2), 340–363.

12

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Moore, B., Jr. (1966). The social origins of dictatorship and democracy. Boston, MA: Beacon.
North, D. (1990). Institutions, institutional change and economic performance. New York,
NY: Cambridge University Press.
Perrow, C. (2002). Organizing America: Wealth power and the origins of corporate capitalism. Princeton, NJ: Princeton University Press.
Pierson, P. (1994). Dismantling the welfare state? Reagan, Thatcher, and the Politics of
Retrenchment. Cambridge, England: Cambridge University Press.
Powell, W. W. (1990). Neither market nor hierarchy: Network forms of organization.
In L. L. Cummings & B. Shaw (Eds.), Research in organizational behavior (Vol. 12, pp.
295–336). Thousand Oaks, CA: Sage.
Prasad, M. (2006). The politics of free markets: The rise of neoliberal economic policies in
Britain, France, Germany, and the United States. Chicago, IL: University of Chicago
Press.
Prasad, M. (2012). The land of too much: American abundance and the Paradox of Poverty.
Cambridge, MA: Harvard University Press.
Quinn, S. (2008). The transformation of morals in markets: Death, benefits, and
the exchange of life insurance policies. American Journal of Sociology, 114(3),
738–780.
Roy, W. (1997). Socializing capital: The rise of the large industrial corporation in America.
Princeton, NJ: Princeton University Press.
Scott, W. R. (2001). Institutions and organizations. Thousand Oaks, CA: Sage.
Selznick, P. (1949). TVA and the grass roots. Berkeley, CA: University of California
Press.
Selznick, P. (1957). Leadership in administration: A sociological interpretation. New York,
NY: Harper and Row.
Shepsle, K. (2005). Rational choice institutionalism. Cambridge, MA: Harvard University Press.
Simmons, B., Dobbin, F., & Garrett, G. (2008). The global diffusion of markets and democracy. Cambridge, England: Cambridge University Press.
Skocpol, T. (1979). States and social revolutions: A comparative analysis of France, Russia,
and China. New York, NY: Cambridge University Press.
Soule, S. A. (2009). Contention and corporate social responsibility. New York, NY: Cambridge University Press.
Steensland, B. (2008). The failed welfare revolution: America’s struggle over guaranteed
income policy. Princeton, NJ: Princeton University Press.
Steinmo, S., Thelen, K., & Longstreth, F. (Eds.) (1992). Structuring politics: Historical
institutionalism in comparative analysis. New York, NY: Cambridge University Press.
Strang, D., & Meyer, J. W. (1993). Institutional conditions for diffusion. Theory and
Society, 22(4), 487–511.
Thelen, K. (2004). How institutions evolve: The political economy of skills in Germany,
Britain, the United States, and Japan. New York, NY: Cambridge University Press.
Tsebelis, G. (2002). Veto players: How political institutions work. Princeton, NJ: Princeton
University Press.

Institutions and the Economy

13

Uzzi, B. (1996). The sources and consequences of embeddedness for the economic
performance of organizations: The network effect. American Sociological Review,
61(4), 674–698.
Vasi, I. B., & King, B. (2012). Social movements, risk perceptions, and economic outcomes: The effect of primary and secondary stakeholder activism on firms’ perceived environmental risk and financial performance. American Sociological Review,
77(4), 573–596.
Veblen, T. (1904). The theory of business enterprise. New York, NY: Scribner’s.
Vogel, D. (2005). The market for virtue: The potential and limits of corporate social responsibility. Washington, DC: Brookings Institute Press.
Weber, K., Heinze, K., & DeSoucey, M. (2008). Forage for thought: Mobilizing codes
in the movement for grass-fed meat and dairy products. Administrative Science
Quarterly, 53, 529–567.
Weir, M., & Skocpol, T. (1985). State structures and the possibilities for ’Keynesian’
responses to the great depression in Sweden, Britain, and the United States. In
P. Evans, D. Rueschemeyer & T. Skocpol (Eds.), Bringing the state back in (pp.
107–163). New York, NY: Cambridge University Press.
Whitford, J. (2005). The new old economy: Networks, institutions, and the organizational transformation of American manufacturing. Oxford, England: Oxford University Press.
Whitley, R. (1992). Business systems in East Asia: Firms, markets, and societies. London,
England: Sage.
Williamson, O. E. (1985). The economic institutions of capitalism. New York, NY: Free
Press.
Yonay, Y. (1998). The struggle over the soul of economics: Institutionalist and neoclassical
economists in American between the wars. Princeton, NJ: Princeton University Press.
Zald, M. N., & Denton, P. (1963). From evangelism to general service: The transformation of the YMCA. Administrative Science Quarterly, 8, 214–234.
Zelizer, V. (2005). The purchase of intimacy. Princeton, NJ: Princeton University Press.
Zelizer, V. (2012). How I became a relational economic sociologist and what does that
mean? Politics and Society, 40(2), 145–174.
Zelizer, V. A. (1983). Morals and markets: The development of life insurance in the United
States. New Brunswick, NJ: Transaction Publishers.

FURTHER READING
Biggart, N. W. (2001). Introduction. In N. W. Biggart (Ed.), Economic sociology: A reader.
Oxford, England: Blackwell.
Campbell, J. L. (2004). Institutional change and globalization. Princeton, NJ: Princeton
University Press.
Dobbin, F. (Ed.) (2004). The sociology of the economy. New York, NY: Russell Sage Foundation.
Dobbin, F. (Ed.) (2004). The new economic sociology: A reader. Princeton University
Press: Princeton, NJ.

14

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Granovetter, M., & Swedberg, R. (Eds.) (2001). The sociology of economic life. Boulder,
CO: Westview Press.
Scott, W. R. (2007). Institutions and organizations: Ideas and interests (3rd ed.). Los Angeles, CA: Sage.
Smelser, N. J., & Swedberg, R. (Eds.) (2004). The handbook of economic sociology. Princeton, NJ: Princeton University Press and Russell Sage Foundation.

CARL GERSHENSON SHORT BIOGRAPHY
Carl Gershenson is a doctoral student and National Science Foundation Graduate Research Fellow in the Sociology Department at Harvard
University. His research focuses on the origins of the American business
corporation.
FRANK DOBBIN SHORT BIOGRAPHY
Frank Dobbin is Professor of Sociology at Harvard. His Forging Industrial
Policy: The United States, Britain, and France in the Railway Age (Cambridge,
1994) traces the roots of contemporary industrial policy approaches to the
institutional logics of political order in different countries. The New Economic
Sociology: An Anthology (Princeton, 2004), ties modern economic sociology to
classical sociological theory. The Sociology of the Economy (Russell Sage Foundation 2004) showcases the range of the new economic sociology. Inventing
Equal Opportunity (Princeton, 2009) explores how corporate human resources
professionals defined what discrimination meant under the Civil Rights Act.

RELATED ESSAYS
Party Organizations’ Electioneering Arms Race (Political Science), John H.
Aldrich and Jeffrey D. Grynaviski
Global Economic Networks (Sociology), Nina Bandelj et al.
The Public Nature of Private Property (Sociology), Debbie Becher
Returns to Education in Different Labor Market Contexts (Sociology), Klaus
Schöemann and Rolf Becker
Inefficiencies in Health Care Provision (Economics), James F. Burgess et al.
Neoliberalism (Sociology), Miguel Angel Centeno and Joseph N. Cohen
Domestic Institutions and International Conflict (Political Science), Giacomo
Chiozza
Elites (Sociology), Johan S. G. Chu and Mark S. Mizruchi
Trust and Economic Organization (Sociology), Karen S. Cook and Bogdan
State

Institutions and the Economy

15

Stability and Change in Corporate Governance (Sociology), Gerald F. Davis
and Johan S. G. Chu
Financialization of the US Economy (Sociology), Gerald (Jerry) F. Davis and
Suntae Kim
Global Income Inequality (Sociology), Glenn Firebaugh
Interdependence, Development, and Interstate Conflict (Political Science),
Erik Gartzke
Labor Market Instability, Labor Market Entry and Early Career Development
(Sociology), Michael Gebel
Organizational Populations and Fields (Sociology), Heather A. Haveman and
Daniel N. Kluttz
Modeling Coal and Natural Gas Markets (Economics), Franziska Holz
Family Formation in Times of Labor Market Insecurities (Sociology), Johannes
Huinink
Innovation (Economics), Adam B. Jaffe
Search and Learning in Markets (Economics), Philipp Kircher
Transformation of the Employment Relationship (Sociology), Arne L. Kalleberg and Peter V. Marsden
Domestic Political Institutions and Alliance Politics (Political Science),
Michaela Mattes
Rationing of Health Care (Sociology), David Mechanic
Organizations and the Production of Systemic Risk (Sociology), Charles
Perrow
Economics and Culture (Economics), Gérard Roland
Sociology of Entrepreneurship (Sociology), Martin Ruef
Impact of Limited Education on Employment Prospects in Advanced
Economies (Sociology), Heike Solga
The Institutional Logics Perspective (Sociology), Patricia H. Thornton et al.