Are institutions cyclical, counter-cyclical, or non-cyclical?

May 20, 2009 at 1:50 pm

| Gabriel |

Here’s a question for all you institutionalists — what do we expect to happen to institutions in a sustained economic downturn? For the sake of argument, let’s just assume that we can fairly clearly distinguish between rational and ritualistic economic behavior. That is, let’s go way back to Meyer and Rowan and assume that most of the kinds of things that institutionalists study don’t directly benefit the firm in any proximate sense but are a burnt offering to maintain the pax deorum with the legitimacy spirits. Furthermore, let’s assume that we can find a latent variable for ritual rather than just measure particular rituals (whose popularity may be epiphenomenal). In other words, let’s imagine that we can measure something like the population of B-Ark or the Gross National Ritual (GNR). We can then ask, is GNR cyclical, counter-cyclical, or non-cyclical? I can think of an argument for each (and make a crude association with a flavor of institutionalism) but I’m sincerely curious what others(Pierre? Brayden? Kieran? anyone?) have to say.

Cyclical (Meyer and Rowan)

This argument goes that ritual is a superior good and follows pretty directly from Maslow’s hierarchy of needs. To transpose it to the corporate environment it would be that first you worry about at least breaking even and then you worry about whether you’re contributing to social value. Some arguments go that CSR is not about management leaving money on the table to do right, but is actually efficient in a “doing well by doing good” kind of way. OK, let’s unpack these arguments, most of which are about pleasing customers and pleasing employees. I think it’s fair to say that however true it may be that customers and employees value companies that have gone carbon neutral and scrupulously ensure that their suppliers use sustainable practices, they care about all this a lot less when they are terrified about the economy. Consider that right now Whole Foods is trading at 27% of its January 2006 price whereas the equivalent figure for WalMart is 109%.

Counter-cyclical (Pfeffer and Salancik)

The Chevy Volt’s total development budget is about a billion dollars and even when they start production it in a few years each car will lose several thousand dollars. That is, it’s like the entrepreneur in Chelm who loses money on each transaction but figures he’ll make it up on volume. Nonetheless, if I were (God forbid) an executive at GM right now the last program I would cut would be the Chevy Volt. The reason is because right now GM is so far in the red that laying off a couple of guys who design batteries won’t get them close enough to solvency to matter. What it will do is piss off the state, which is currently shoveling money at GM in a desperate bid to keep it (and its suppliers) out of liquidation. The interesting thing is that GM knows that the Volt would never be profitable even if successful and basically commissioned it as a symbolic gesture.

Now the issue isn’t just GM. We’ve seen similar (and much more directly coercive) action with the TARP banks where the state has forced a lot of symbolically resonant moves of dubious efficacy like the AIG clawbacks. The fact is that the state has been in a very Keynesian lately, but a very symbolically attuned Keynesian state.

Note that my cyclical and counter-cyclical arguments are basically about industry. So one way to harmonize them is to expect that you might see a lot less contribution to GNR coming out of firms in retail and a lot more contribution to GNR coming out of firms that are about to become much more sensitive to the state in FIRE, heavy manufacturing, construction, and energy.

Non-cyclical (Dobbin)

I see the best argument for GNR being non-cyclical as basically being that companies are too paralyzed by internal stakeholders to respond to the cycle. So for instance a lot of Dobbin’s work has shown that affirmative action started in response to aggressive state civil rights enforcement after Duke v Griggs but it continued even under Reagan because by that point firms had created entrenched internal stakeholders to argue for the policy even after the state stopped caring. Thus in this scenario you could say that firms just do institutions whether or not they really need to in order to please the state, their customers, or their employees (the ones outside of HR and legal). Likewise, you could say that firms are so boundedly rational that they don’t know which of their behaviors are ritual and which are technical. I believe a weak version of this argument but am skeptical of a strong version. Nonetheless even if you accept it, this is where population ecology comes into play. However if a downturn is short enough, and ritual is a small enough portion of expenses, then it’s likely that a selection model would let highly ritualistic firms ride out the increased selective pressure for efficiency.

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