DiMaggio and Powell, Introduction to The New Institutionalism, 1991

The collection of essays for which this article is the introduction seeks to "provide fresh answers to old questions about how social choices are shaped, mediated, and channeled by institutional arrangements." The problem has been that the findings of organizational studies (according to March and Olsen) are often inconsistent with rational action or functionalist org theory, so something new needs to be developed. New institutionalism (also called "neoinstitutionalism") in all social science subfields (econ., poli sci, history, etc.) are united by "a common skepticism toward atomistic accounts of social process and a common conviction that institutional arrangements and social processes matter." That is, the actors within orgs are often treated as rational, individual beings who are not interdependent. Neoinstitutionalism seeks to demonstrate that actors can behave in "irrational" ways because they are embedded within pre-existing organizational systems.

Microeconomic theory is basically a form of game theory: actors seek to maximize utility functions through rational choices about ordered preferences. N.I. seeks to make this model more realistic: the basic tennents of microeconomics hold, but they must include cognitive limits (I would prefer chocolate cake to apple pie but I am too mentally deficient to know the difference), incomplete information (I would prefer cake to pie if I had ever tried cake, which I haven't), and difficulties in monitoring and enforcing agreements (the metaphor breaks down here- sorry). Orgs can exist when the perceived benefits of the org are greater than the transaction costs that org has (see the article summary on transaction costs! If it costs you millions of dollars to set up a three-person catering business because of legal fees, insurance, etc., you may decide not to do it at all). The transaction is the primary unit of analysis within N.I.

Consider this as well: although the benefits of an org may exceed its transaction costs, those costs may shift making the existence of the org "sub-optimal." N.I. argues that orgs may continue to exist sub-optimally, "serving no one's interests," simply because they have existed in the past. This attitude is anti-rational, yet prevalent.

N.I. seeks to include the effects of such irrational variables as the influence ideological consensus on transaction costs: where such consensus is high, transaction costs may be lowered, and vice versa: "thus, ideological consensus represents an efficient substitute for formal rules." Cult members may work for free, asking for no labor contracts or health benefits; communits rebels and fascist dictators, on the other hand, will have a hard time agreeing on a form of government because neither trusts the other: extensive formal rules will be necessary under such conditions.

Critical concept: recently, international relations scholars have come to question the use of rational actor models to international institutions- "institutions do not merely reflect the preferences and power of the units constituting them; the institutions themselves shape those preferences and that power." That last sentence sums up all neoinstitutional theory in a nutshell.

Ultimately, N.I. within orgs studies "comprises a rejection of rational actor models, a turn toward cognitive and cultural explanations, and an interest in supraindividual units of analysis that cannot be reduced to aggregations or direct consequences of individuals' attributes or motives." In doing so, N.I. focuses less on local activities (like Selznick's finite analysis of the TVA) to more industry wide events (like hydroelectric power generators in general), pointing out universal homogeneity (isomorphism) of these orgs and their taken-for-granted practices and even existences. The origins of actor's preferences are now on the table, along with the feedback between actors' interests and the institutions they comprise.

However, the rejection of rational action is not universal: while agreeing with rational action theorists that things like "sunk costs" (e.g., a company invests heavily in a tool for which there is low demand but high price-- then it becomes impossible for that company to invest more resources in yet another tool when the demand changes) and technical interdependence (you can only use VHS tapes in VHS machines, even if Beta is, for some reason, a fundamentally better system) are responsible for "institutional inertia" (i.e., absence of change), N.I. also emphasizes that change is prevented sometime simply because "individuals cannot conceive of appropriate alternatives." Institutions establish the criteria by which people discover their preferences- some of the most important sunk costs are cognitive!!!

The next section of this article describes the difference between the new institutionalism and what the authors call the old institutionalism. Both are skeptical of rational actor perspectives; both argue that institutions define criteria for conceivable individual choices; both emphasize the relationship between orgs and their environments; both emphasize the role of culture in shaping "organizational reality." The birth of N.I. is cited as the Meyer and Rowan article (on our reading list) on myth and ceremony, with roots traced to Selznick and the TVA book (also in the readings). The details of the differences between neoinstitutionalism and the old institutionalism are subtle and not very interesting; you will never need to be able to recount them on the test, but you should know that there was a shift. If you feel the urge to mention something, you can point out that the old version was more concerned with the local environment (like "just" the Tennessee Valley) where the new version looks at a broader perspective (as mentioned a paragraph or two ago- whole institutions like professional associations).

People have routines, and often behave without conscious thought, even when that behavior seems irrational. Since these actors constitute orgs, orgs often behave irrationally. I think I have dwelt on this idea enough at this point, but it is the main thrust of this topic of new institutionalism- and probably all you need to take from it.