A few years ago, we participated in a conference in which core issues in the economics of institutions and organizations were discussed by academic economists (see the June 1993 issue of the Journal of Comparative Economics). We were struck then by the fact that norms, values, and the effects on these of historical processes were frequently mentioned during the paper sessions, yet were largely absent from the formal analyses of the papers. We noticed too that in casual conversations over meals, we found ourselves talking about problems such as crime, drug abuse, our declining sense of community, family instability, and the moral culture confronting our children, problems that seemed to be of great importance to our lives but that had little intersection with our economic analyses, though these purported to deal with the most basic institutional structures of society. Surely, we thought, how society organizes its economic life must have far-reaching consequences for such problems through its influence both on people's economic opportunities and incentives, and also on their normative attitudes and preferences. For instance, how much we invest in personal relationships may depend in part upon whether they promise dimensions of economic and physical security that are unavailable from the market and the state. But such investment decisions may also depend on how much we value the relationships in their own right, and on whether we believe that we can identify others who likewise do so. Both economic changes and changes in valuations and trust could alter our calculations, and one type of change may well impact upon the other.

Introduction

The subject of values was once considered to lie beyond the purview of economic science. Preferences, taken as given to the agent and society, were seen as being about goods, dates of consumption, and states of the world, not about means (how to behave), or about beneficiaries other than the self. But as industrial civilization ends a turbulent century with rising anxiety over its social health and cohesion, the subject of values has begun seeping into economic discourse.

That neoclassical economics viewed values as an alien issue may have been natural given the positivistic spirit of its proponents. Robbins (1932) defined economics as a science of means–ends relationships, with the choice of ends (preferences) being of no account. And when Adam Smith's “Invisible Hand” revealed itself in the theory of general equilibrium, its manifestation was that of a vector of prices supporting an optimal allocation of resources, with preferences, technologies, endowments, and even the structure of property rights and institutions taken as givens. “De gustibus non disputandum est” and, a fortiori, “de moribus,” since economics was becoming a science of prediction and testing, whereas value statements are inherently not amenable to falsification. Assuming behavior based on self-interest, exploring where that led using deductive reasoning and mathematics, and testing the resulting conclusions using data on observable choices: These became the methodological Tao of the economics profession.

But as research in the neoclassical tradition expanded, it became clear that the economics of the mid-twentieth century had not really been as self-consistent as had been hoped.

Introduction

A multitude of individuals and entities (“participants”) have a stake in any organization. Resource suppliers, for example, have an interest in how an organization functions because their own well-being is affected via their remuneration. Likewise, the welfare of the users of an organization‘s output is affected by price, quality and other decisions made in the organization. The interests of various participants with a stake in the same organization are both intertwined and divergent. Participants seek both to maximize the total return from their common transactions (i.e., the size of the surplus that can be distributed among them) and to maximize their respective shares in the surplus. The desire to maximize total surplus amounts to maximizing productivity and technical efficiency and minimizing production and transactions costs; this draws participants together and drives them to cooperate. The goal of maximizing individual shares propels participants to conflict with each other (either individually or in groups), possibly to the detriment of the size of the total surplus.

Incentives for both cooperation and conflict exist because participants must often bear some costs in moving from one organization to another and because participants who have already collaborated together, having developed relationship-specific human and physical capital, are capable of generating more value than other combinations of participants (Aoki, 1984; FitzRoy and Mueller, 1984).

Cooperation and conflict characterize all organizations. Likewise, control is employed universally. Different organizational structures, production technologies and environments are associated with different degrees of cooperation and conflict and with different methods of control.