Chapter 9: The Path for Institutional Innovation

An institution represents a series of rules that guide or restrict human behavior and includes formal systems (e.g., governments), informal systems (e.g., barter networks), and mechanisms that define the operation of these systems. Formal systems refer to a series of rules enforced by laws and regulations and that are clearly defined by the government or other authorities. Informal systems refer to a series of behavioral norms formed by people during long-term social interactions and include personal ethics, cultural customs, and ideologies, which rely on social (rather than legislative) pressure to enforce suitable behavior and encourage non-compulsory behavior through morality.

Institutions operate within a larger social system. They can be understood as a philosophical approach to solving problems. For example, they may be a combination of solutions for implementing government policies, institutions for dealing with interpersonal problems, and institutions for the interactions between governments, citizens, and the environment. They also represent a cultural background that shapes how people deal with problems. With the rapid progress of technology during the past century and the resulting rapid changes in the social environment, the balance of interests among social groups has become stressed and may even be broken. Thus, society must solve the resulting problems and form a new balance through institutional reform (North, 1971). Trying to design a system that can balance the interests of many individuals, organizations, and social groups is more like an art than a science (Ruttan, 1999). Therefore, political actions that attempt to rebalance the interests of all stakeholders are a complex blend of art and science.