Companion to Building Block 5: Economic Organisations & Mechanisms
In this chapter, we provide a brief overview of the literature on the complex topic of coordination and allocation mechanisms, digging deeper into the topic of the fifth building block, Economic Organisations & Mechanisms. Three strands of literature on economic mechanisms are covered: (1) Economic Anthropology; (2) Social Systems of Production; and (3) New Institutional Economics. Below we briefly describe these literatures and the concepts they have developed to analyse the organisation of economic life.
Before delving into each of these three strands of literature, we discuss the main source of inspiration in the literature on economic mechanisms: the work of Karl Polanyi. He is often seen as the first who developed a systematic framework of different economic mechanisms and still forms an useful pedagogical starting point for learning about coordination and allocation mechanisms.
In the final heading of the chapter, we discuss how these different strands of literature can be taught in courses, based on the level of the class and the available teaching time.
Finally, a note on the wide variety of terms used in the literature. Unfortunately, the three different strands of literature are often not in contact with each other and also use different words to describe roughly the same things. This can complicate navigating these literatures, especially for undergraduate students. Perhaps most importantly, there are multiple terms for describing the ways of organizing economic processes: from forms of integration to models of social order, modes of exchange, governance structures, realms of provisioning, and the one we use in this book, coordination and allocation mechanisms. In this chapter, we hope to show the unique contributions of these different strands of literature but also how they overlap with each other, and help to navigate these terminologies and literatures.
Karl Polanyi’s Framework
Polanyi, in The Great Transformation and The Economy as Instituted Process, laid the foundation for the literature on economic mechanisms by developing a systematic conceptual framework that encompasses the different ways in which economic life is organized throughout human history, from small-scale hunter-gatherer societies to modern industrial societies.
His conceptual framework consisted of the following four concepts:
- Trade: Market exchange of goods and services with the help of price mechanisms.
- Redistribution: Allocation and coordination of the production and distribution of goods and services through a central entity.
- Reciprocity: Reciprocal exchanges between symmetrical social entities through mutual obligations.
- Householding: Economic production on an autarkic self-sufficient basis.
These different categories still form the conceptual basis form much of the literature discussed below. Trade and redistribution refer to the concepts of markets and hierarchies as discussed in the building block Economic Organisations & Mechanisms. Reciprocity refers to economic interactions that are based on symmetry and mutuality (in the below section on economic anthropology we explore the concept in more detail). Finally, there is the concept of householding, which implies the absence of economic interaction as it refers to being economically self-sufficient.
While householding has arguably become less important as a way of organizing economic life, there are still many people, especially in rural areas around the world, who produce for themselves and their households. Furthermore, we all engage in householding activities every day when we take care of ourselves by making food and cleaning, as feminist economists and sociologists emphasise in time-use research. It is also important to note that pure self-sufficiency would imply an individual being completely isolated – a rare situation. Within households there are many social interactions that can be characterized by reciprocal, hierarchical, or communal relations.
It is worth remembering that the term economics arrives its origins from the ancient Greek word for householding, oikonomíā. But as with many words, the meaning of the word has changed over time. Aristotle wrote in the context of the ancient Greek economy in which most households had slaves. Oikonomíā was about the responsibility of free men to run their households properly. He put the term in contrast to chrematistics, which referred to money making and accumulating riches through commerce and finance. While householding was seen as legitimate, gain-seeking chrematistics was condemned as being unethical and unnatural. He argued people should focus on producing useful products, not making money for its own sake. And if money was involved, they should charge a just price, rather than making as much profit as possible.
Anthropologists were traditionally the social scientists focused on analysing the great variety of non-western societies, while the other social sciences focused on current western societies. As such anthropologists were exposed to a wide diversity of economic practices and forms of organization. From gift economies and ceremonial exchanges, to barter and one-way economic transfers. This triggered many scholars, among which Karl Polanyi, to develop new concepts to capture the complexity of economic life across the world.
A key breakthrough in thinking about different ways of organizing economic processes came from founders of the anthropological discipline, such as Bronisław Malinowski and Marcel Mauss, studying what were later called ‘gift economies’. Instead of basing exchanges on transactional agreements, exchanges of products in a gift economy are based on the principle of reciprocity. Giving someone a gift creates the social obligation for this person to return the favour to you at a certain point. In this way, products are circulated in an economy based on social norms, customs, and relations. In the western world the example of birthday gifts often comes to mind, but it is important to note that for many services people use the same principle. Whether it concerns co-workers, family members or strangers we often help each other without asking for money or being commanded by a superior. These could all be understood as economic activities based on reciprocity, rather than hierarchy or trade.
Since the foundation of the subdiscipline of economic anthropology, there have been many in-depth studies of different forms of economic circulation by scholars, such as Paul Bohannan, Marshall Sahlins, and Chris Gregory. A good overview is this literature is given in A Handbook of Economic Anthropology by James G Carrier in Part III on Circulation, which describes empirical studies and conceptual frameworks related to the following concepts (which often overlap with each other):
- Ceremonial exchange: Items of value are publicly displayed and given to partners on a reciprocal basis over time.
- Gift exchange: Ceremonial and non-ceremonial give-and-take exchanges related to identities and social bonds, which may be cooperative, competitive or antagonistic.
- Barter: Direct exchange of goods or services for each other without the
- medium of money (typically distinguished from gift exchange because the focus of interest is in the transaction rather than the social relation).
- Market exchange: Diffuse interaction between suppliers and demanders that determines the prices of labor, resources and outputs.
- One-way economic transfers: The transfer of an economic product without a counter-move of a product (there can be an effect on prestige or power, but this does not necessarily have to be so).
Social Systems of Production
There is an interdisciplinary network of economic sociologists, economic historians, political economists, and economists, such as Wolfgang Streeck, J. Rogers Hollingsworth, Philippe C. Schmitter, and Robert Boyer, that analyse how economic institutional structures, sometimes also called the social systems of production, differ between places.
An important early publication in this strand of literature was the paper Community, Market, State-and Associations? by Streeck and Schmitter. For each concept they describe its guiding principle for coordination and allocation, what actors typically follow its logic, and what motives and rules accompany them. They described the market and state as being based on dispersed competition and hierarchical control respectively. Community refers to spontaneous solidarity and relies on collective identity, ascriptive member status as well as trust and respect. The concept of associations, the core of their paper, is based on organizational concentration and collective self-interest of social groups. They use it to better understand civil society, guilds, professional corporations, labour unions and employer organizations, and build on the ideas of Hegel, Saint-Simon, Durkheim and Keynes.
Since then many empirical studies and conceptual innovations have been made. A key new conceptual framework was presented in the book Contemporary capitalism – The embeddedness of institutions by Hollingsworth and Boyer. They made a distinction between public and private hierarchies, but left the concepts of markets, communities and associations largely in place as Streeck and Schmitter had earlier defined them. Finally, they added the concept of networks which refer to relations and bonds that last over periods of time and are based on some level of trust but do not require group membership.
As such, the full list of coordination mechanisms is as follows:
- Markets: Bilateral voluntary spot exchange based on individual self-interest and the enforcement of private property.
- State: Unilateral action and exchange based on legal rules and coercion.
- Private hierarchies: Exchange based on asymmetric power and bureaucratic rules.
- Communities: Multilateral voluntary exchange based on social solidarity and high degree of trust based on collective norms and moral principles.
- Associations: Multilateral voluntary exchange based on collective self-interest and organizational concentration.
- Networks: Bilateral or multilateral voluntary exchange based on relations, contractual bonds and dependencies.
New Institutional Economics
In the last decades, economists have also increasingly been studying coordination and allocation mechanisms. This research is often given the label of new institutional economics, but this is a rather loose category, ranging from highly schematized simple models to more complex conceptual frameworks.
A basic model, staying close to neoclassical economics, is that of Oliver Williamson. He largely stays within the rather simple binary conceptual framework of markets and hierarchies. He tries to explain institutional outcomes by using a neoclassical optimizing framework in which the emphasis is put on minimizing transaction costs.
A more complex framework, to capture more of the real world complexity, is developed by Elinor Ostrom. She is most famous for her analyses of commons (as discussed in the building block Economic Organisations & Mechanisms). But she has also contributed to general analyses of institutional arrangements. Here the concept of polycentricity, which aims to recognize complex economic systems with multiple centres of decision-making, is important. It implies that different domains, such as firms, families, community organizations, local and national governments, have substantial independence so that they can make and have their own rules and ways of organizing processes.
To better understand these complex realities, she developed the Institutional Analysis and Development (IAD) framework. The framework builds on a vast array of theoretical ideas, such as collective structures (Floyd Allport), bounded rationality (Herbert Simon), transactions (John Commons), logic of the situation (Karl R. Popper), frames (Irving Goffman), and scripts (Roger C. Schank and Robert P. Abelson). The framework aims to explain and predict outcomes by systematically mapping the governance structures, formal and informal rules, actors and contexts. In terms of biophysical and material conditions, she distinguishes four basic types of goods and services on the basis of two attributes (see table below).
|Subtractability of use|
|Difficulty of excluding potential beneficiaries||Low||High|
|Low||Toll / Club goods||Private goods|
|High||Public goods||Common-pool resources|
To understand how outcomes are achieved, Ostrom looks at who are participants, what positions they are assigned, what information they have, over what they have control, and how they perceive the net costs and benefits of potential outcomes. To distinguish different kinds of situations she has identified the following four levels of analysis:
- Operational situations: This relates to the day to day decisions regarding economic provisioning, production, distribution, appropriation, assignment and consumption.
- Collective-choice situations: This refers to decisions about how the operational activities should be organized, who can do what and what rules have to be followed.
- Constitutional situations: At a higher level of abstraction, this level is about determining how the collective choice situations should be managed, who is allowed to decide on the operational rules and how they should be made.
- Meta-constitutional situations: At the most abstract level, the rules for constitutional situations are influenced by the community and biophysical context.
The evaluate outcomes and governance structures see looks at the following 5 criteria:
- Economic efficiency: Overall net benefits associated with the allocation of resources.
- Equity: By either looking at the contributions individuals made (in effort or in outcome), or looking at differential abilities to pay.
- Adaptability, resilience, and robustness: The ability of a governance structure to successfully last overtime.
- Accountability: Whether citizens are able to scrutinize officials for their actions and decisions to prevent opportunistic behavior.
- Conformance to general morality: Whether the institutional arrangements foster fair and moral behavior.
Her work is not only of academic relevance, it also has important policy implications. Much of public policy advocated by economists has focused on designing institutions to incentivize, force or nudge (self-interested) individuals to achieve better outcomes. Her research, however, shows that human beings are more capable to solve social dilemmas than thought in earlier rational-choice theory. Therefore, she argues public policy should focus on facilitating self-governance and diverse polycentric institutions, rather than assuming this won’t work and pushing for either market or state-based solutions. Such an approach, she claims, would lead to economic systems in which there is more innovation, learning, adaptation, cooperation, trustworthiness, and equitable, sustainable and effective outcomes.
Having discussed the various strands of literature on coordination and allocation mechanism, we now shortly describe how these contents can be taught in a course. This advice can be combined with the heading Practical Suggestions within the building block Economic Organisations & Mechanisms.
If one has little teaching time that can be devoted to mechanisms, we suggest focusing on the limited set of elements discussed in the building block Economic Organisations & Mechanisms. Explaining to students what coordination and allocation mechanisms are and giving the examples of markets, hierarchies and commons. For this, the chapters 1, 2 and 3 in Governing the Commons by Elinor Ostrom are particularly useful. In this way, students learn the concept of mechanisms and realize that there are others besides markets and hierarchies. The goal should thus not be to teach a lot of details or sophisticated models of mechanisms, but instead give students impressions by exposing them to concepts and real-world cases.
If there is more space available in a course, one could extend the number of mechanisms that are discussed by including the introductory chapter of the book Contemporary Capitalism: The Embeddedness of Institutions. This will mean students will also learn about communities, associations and networks as well as the difference between private and public hierarchies. The text of this book is here and there somewhat complex, but it provides a clear overview, using well-designed tables and figures.
Finally, if there is a lot of teaching time available, one could introduce students to start by reading Polanyi’s original framework and dive into each of the three strands of literature after this. So, for example, using the following readings:
- Polanyi: A few chapters of The Great Transformation (for example chapters 4 & 6) and the chapter The Economy as Instituted Process.
- Economic Anthropology: A few chapters about economic circulation in the book A Handbook of Economic Anthropology (Part III on Circulation, chapters 14-18).
- Social Systems of Production: The paper Community, Market, State-and Associations? by Streeck and Schmitter, and a few chapters of the book Contemporary Capitalism: The Embeddedness of Institutions (for example chapters 1, 2, 3, 4 & 9).
- New Institutional Economics: Governing the Commons (for example chapters 1, 2, & 3) and Understanding Institutional Diversity (for example chapters 1, 2, 8 & 9).