This article will rigorously define, compare and contrast organizations and institutions.
This article is a bit long but worth the read. It is an improved version of part of a paper I wrote for a public policy class during graduate school. The paper received an A- and I am confident it would have been an A if I had made the changes this version contains. The article begins with the next paragraph.
The relationship between the idea of an organization and the idea of an institution is complicated because each term can be used in reference to two different ideas.
Prima facie an organization means a thing which is organized. This would mean that an organization is any set of elements which is arranged in a particular way. The purpose of studying organization this way is to examine the effects of the manner of organization itself on how certain elements operate. An example of this first kind of organization might be a book. The arrangement of chapters will impact the way the book is read, taught or learned. For example, many biographical books will have chapters arranged chronologically. Science textbooks, on the other hand, have chapters arranged by subject. During the same period of history there may have been research going on in both astronomy and nuclear power, but it serves the purpose of the science book better to arrange subjects atemporally.
Another definition of organization is the sociological definition of organization. Within the field of sociology the term organization means something somewhat but not altogether different from the first definition. There is an assumption within sociology that at least some of the elements of an organization are social, or human, elements. The sociological definition of organization is a group of two or more people with a collective goal or interest. This makes an organization under this second definition, the sociological definition, a subset of the kinds of organizations described by the first definition. By far the most usually referenced example of a social organization would be a corporation. For a more specific example we might consider the State Farm insurance company. Although discussions on social organization are often related to corporations, these are absolutely not the only kinds of social organizations. An unincoporated association such as an informal social club is another kind of organization. It is the second definition which is related to institutions in a way that we will soon discuss, but first let’s go over what exactly an institution is.
Like the term organization, the term institution can have two meanings. The term institution is also often used in a third way which is more or less an incorrect and confusing usage which I will also discuss. The term institution can on the one hand refer to a social norm. These social norms may be ideas, practices or both. These social norms are so widely established that they begin to have significant determining effects on social activity through an effect similar to a kind of peer pressure. These norms serve to distinguish politically correct, popular and socially acceptable ideas and customs from their negations. Institutions are major pillars of the culture of a society. An example would be the institution of marriage in the United States. The fact that marriage is an institution in the United States means that in the United States the concept and practice of marriage is normally understood and practiced in a particular way across the United States, is a pillar of United States culture and in the United States it has become so socially predominant that it has become an input to and driver of the the thought processes, worldviews and actions of people there.
Institutions are different from mere ideas and practices, or even shared ideas and practices, because of the requirement of social normalcy and significance. One problem with the ideas of significance and normality is that these requirements are very ambiguous. Whenever we talk about something as normative in the statistical sense, it is always bounded by an arbitrary confidence level. Whenever we talk about statistical significance it is also somewhat arbitrary. Furthermore, not all institutions are equal. For all of these reasons it is misleading to create this idea that an idea or practice is either an institution or not an institution, as it if were a light switch which may only be set to entirely on or entirely off. To eliminate this ambiguity it is preferable to conceive of institution as a quality along a spectrum. If we look at institution as a quality along a spectrum we would need to change the term from a noun, institution, into an adjective or adverb, institutional. In a sense, the entire field of political science should be institutionalized. All ideas and practices would fall on this spectrum of institutionalism, or institutionality if you prefer, but those ideas and practices which impact culture to a greater degree would be further along the spectrum. The paradigm would change from institution as a light switch to institution as a quality. We would no longer say that marriage is an institution while something less normally considered and practiced like goat breeding is not an institution. Instead, we would say that marriage is more institutional than goat breeding in the United States, although if goat breeding were practiced at all it would be an institution in some sense. What we would be expressing in this way is that marriage is a larger component of United States culture than goat breeding, but if goat breeding was practiced at all it would affect culture to some degree. This improvement would require a real paradigm change inside sociology today, but I think it would lend itself to clear thought and mathematical modelling which may provide incentive for the change.
Institutions in the first conception imply that an institution is a special kind of idea or information. Ideas and information flow to and from social, human and intelligent minds and sources. Whenever the originating minds and sources constitute an organization, that originating organization is considered an institution under a second definition of the term institution. In other words, the second definition of an institution is an organization or collection of organizations which creates or encourages institutions of the first definition. Institutions create institutions. These second kinds of institutions may be thought of as trend setters, influencers or leaders, except for one technicality in the idea of leadership. In the technical sense there is a slight distinction between a leader and an institution of this kind. A leader may be an individual, but an instititution a sociological organization which, as previously discussed, is a collective entity by conventional thought in sociology. In contrast to conventional thought, the idea that an organization must be a collective entity is entirely artificial and poor in my view. I think any social entity should be considered an organization, even if that entity is an individual, because individuals and organizations are functionality equivalent. Two examples of this second kind of institution would be the United States media and government. The media and government both hold a major influence over information flows, business practices and social norms among other things within the United States. Individuals can and do frequently accomplish those same functions of policy setting, norm setting and institution generation. Some examples of individuals who set policy, set norms and generate institutions would be Presidents, celebrities and successful entrepreneurs.
There is also a third way in which the term institution is used which is more or less an incorrect usage. That is the case in which an organization refers to itself as an institution when it is really not an institution by conventional standards. Perhaps this indicates that an organization is trying to give itself the image of being a institution by the conventional standard, or perhaps it is the case that the organization is aspiring to be a real institution. Whatever the reason, this is a relatively commonplace mistake. Examples of organizations which refer to themselves as institutions while they are clearly not include The Klingon Language Institute.
Policy is directed by culture. Government policy is directed by culture whether the government is a democracy, republic or even an autocracy. To some degree the actions of the government will be influenced, or sometimes outright determined, by culture. If an autocrat would like to maintain his position of power it is in his or her interest to quell the common population from revolt. The way that ruler will best be able to pacify the population depends entirely on the preferences of that population. The ruler will certainly not pacify the population by acting against the interest of the people. This is not to say that the ruler can never act against the will of the people, but it is to say that there is some boundary. In theory, the governance of a pure democracy would be fully determined, rather than influenced or bounded, by the culture.
Institutions influence culture. There is a reason that companies spend hard earned money to purchase television ads. The media is an institution and the ideas that are spread through the media affect culture in a real way. Real changes to culture have been historically observed, not just theoretically predicted, as a result of media ads and other institutional action. These cultural changes represent increases to the bottom line for businesses and others. The idea of culture which we discuss in sociology is equivalent to the idea of consumer preference which is studied in economics and which determines the demand curves of various goods and services. Ads can increase demand which results in more money for business.
Another way in which institutions drive culture is through the determination of law and government policy. Because government is an institution, it becomes a bit of a tautology, but it is still true, to say that government is a driver of law and government policy. In the autocrat example of the relationship between culture and government government was bounded by the popular culture. Notably, although it is a bit of a rabbit trail because this is not my primary point, an autocrat must not be considered an institution according to conventional thinking, although the autocrat provides yet another example of the functional equivalence of individuals to institutions in certain cases. In a pure democracy and in certain conceivable similar governments, government is not bounded by culture but is entirely and fully determined by culture. Autocracy, pure democracy and certain other government systems do not follow the pattern which will be soon described, but most governments across the world today are a mixed or intermediate form of democracy and non-democracy.
For many governments other than autocracy, pure democracy and certain other political systems there is a pattern that holds. In systems such as the representative democracy we have in the United States or the parliamentary governments which preside in much of Europe, the government is an institution which is bounded by the popular culture, but is not fully determined by popular culture. In these cases, which is the case for most actual governments around the world, this leaves a pocket of a variable amount of room in which the government itself is an institution which has a genuine power to determine or plan policy. This provides another example of how institutions can create policy. Therefore we can see that institutions of different forms can play a wide variety of roles in the creation of government policy, although these roles heterogeneously change and vary depending on the particular institution and context. These roles include indirect influence, bounding and direct determination.
Policy is a general thing and does not necessarily entail public policy. There are also policies in the private sector. Business and corporate policies are two subsets of private policy. The rules that parents lay down for their children at home would be another example of private policy. While these are all called policies, and all of these policies are related to various kinds of organizations and institutions, it is important to note that relationship between them does not imply equivocation between them. In other words, just like the role of institutions depend upon context, the policies which are supported by social entities are also heterogeneous. Furthermore, these policies are not only heterogeneous horizontally, but also vertically. Not only does policy vary from business to business or family to family, but policy also varies between government and industry, between industry and corporation, between corporation and a particular business location, and sometimes even from one manager to another inside of a single business front, or from parent to parent inside of a single household! A government policy might affect a private sector policy, but that does not by any means imply that the government policy is equivalent to the private sector policy. The government might create policy boundaries for business, but does not necessarily fully determine business policy. Sometimes the government does determine business policy directly, which is usually considered a form of socialism or communism, but the fact that the government sometimes does directly determine business policy does not negate the fact that the government does not necessarily directly determine business policy.
There are some very important differences between government organizations and private sector organizations in theory, but this is entirely contingent on how we define government. As obvious as it is that the CIA, FBI, DOD, and the rest of the alphabet soup are branches of the government, it is actually surprisingly tricky to define just what a government is. One definition would be that the government is the organization which has a monopoly on the use of force, but this definition falls flatly on its face in light of the second amendment and right to self-defense. Another definition is that a government exercises sovereignty over a geographical area, but this definition fails because there are multiple sovereigns for any particular geographic area. A third attempt to define government would be that it is the provider of certain services including welfare, national defense, certain kinds of national infrastructure and public education. The problem here is that for any particular example of a good or service being provided by the government there is an example of a private company doing the exact same thing. David Friedman, Rose Larken and myself are examples of a few people with rather unconventional definitions of government. For this article we will use David Friedman’s definition of government, which would be that a government is whatever most people recognize as a government.
There are at least two common patterns of difference between what are usually called public and private organizations. Public organizations tend to set policy and distort markets while private organizations tend to take policy and improve markets. The reasons for each of these can be broken into two groups of incentives. Public organizations have more incentives to set various policies than not to set various policies. If a public organization spends and sets policies it renders itself needed, but if it does neither then it may have its budget cut or its perceived usefulness may whither away. This would negatively impact the people working at the public organization in a very real way. These people usually have at least a strong financial motive, and sometimes additional political or other motives, to stay employed. There are incentives for public organizations not to set policy or spend, but those incentives are largely in the form of the complaints of the private sector, which do not carry much weight in most current political systems for a variety of reasons.
Most political systems have feedback mechanisms which are much less responsive than the private sector feedback mechanisms. This is one major reason that public organizations are comparatively less efficient. In the private sector the ability of a company to thrive is based on their ability to please the consumer. If the consumer does not like a company then demand will wither away and the company will directly suffer. There is much weaker mechanism to reduce demand for the public sector because demand for public services exists by public mandate. Furthermore, even if demand for a public service is reduced it is not always the case that the public organization directly suffers, because they are usually paid for through the government policy rather than through their own generated revenues. The public mandates which force demand for public services can be changed through the political system, but the manner in which these public mandates are changed usually has a large delay factor involved in the form of cyclical elections which renders the modification of mandates distinctly not dynamic or responsive. The fact that change is expensive also means that there is sort of a Newton’s First Law or law of inertia for organizations. An organization will not change until it is confronted by an incentive to do so which outweighs the cost of that change. We can create an incentive for change in the government by giving government some competition. Two kinds of way we can introduce competition include public choice, in education for example, and deregulation of certain industries such as energy. This would improve efficiency in those sectors because if those organizations refused to improve practices the consumer could shift to another provider. Another way would be to dramatically reduce the delay factor of election cycles by having elections far more often. A final solution, which is both the most unconventional and also plausibly the most effective, is through the creation of entirely new nations or the elimination of the principle of geographic sovereignty of the state.