The social system approach to institutions: examples from western economic history

While there is a general acceptance of a broad definition of social institutions as accepted rules of conduct in agent interactions, there are overlapping views on how institutions come into being and develop. Different views see institutions as the result of evolution, contract, convention, game theory, political power, or legal necessity. Once created, institutions can live their own life and gain influence on the whole economy/society in respects beyond their intrinsic origins. The overlapping views give the impression of pursued piecemeal approaches in addressing the issues. Treating issues of institutional formation and development in the framework of social system theory and analysis can be shown to simplify the picture appreciably and bring more insight. This paper intends to do that. It will display and apply the social system perspective to understanding institutional formation and development. The paper falls in two sections. First, it develops an analytical framework that views the economy as a social system with interactive subsystems that initiate and maintain their own subsystem institutions. Some subsystems expand faster than others, gaining more influence. Interaction of agents across subsystems facilitates the dominance of the more influential subsystem and the spread of the subsystem’s allied institutions to the whole social system. Second, the paper illustrates the validity of the social system perspective via reviewing a timeline that highlights the changing and evolving dominance of the major subsystems and their attached institutions in the economic history of the western world, and in particular, the interactions between the firm subsystem and the state subsystem.