42 R.R. Nelson, B.N. Sampat J. of Economic Behavior Org. 44 2001 31–54
Our point is that, while the differences are a matter of degree not kind, it is impor- tant not to confound the different meanings. In what follows our focus is on standardized
social technologies, with the institutional environment allowing and shaping these in the background.
4. Routines, and physical and social technologies
We believe that the language of routines, as developed in Nelson and Winter 1982, is a useful vehicle for characterizing social technologies, and we begin our analysis with a
general discussion of the “routines” concept. A routine involves a collection of procedures which, taken together, result in a predictable
and specifiable outcome. Complex routines, of the sort associated with the production of goods and services, almost always can be analytically broken down into a collection of
subroutines. Thus, the routine for making a cake involves subroutines like pour, mix, and bake. These operations generally will require particular inputs, like flour and sugar, and
a stove. In turn, virtually all complex routines are nested and linked with other routines that must be effected to make them possible, or to enable them to yield value. Thus, a
cake-making routine presupposes that the necessary ingredients and equipment are at hand, and the provision of these at some prior date required their own “shopping” routines. And
before these artifacts could get to the store, they had to be designed and produced, activities involving their own complex structure of routines.
As the example suggests, the productive operation of any particular routine generally is keyed to and made effective by the embodiment of the operation of other routines in
materials and equipment see Langlois, 1999 for an elaboration on the theme that routines often are embodied in machines. The cook “turns on” the stove and sets its temperature
gauge to 350
◦
. The stove then carries out its routine. We noted above that our concept of a routine admits, indeed highlights, that choices
are made in the course of performing a routine. On the other hand, the term connotes that the flow of action in the activity proceeds more or less automatically. Routines do
not eliminate choice, but they do sharply channel it. Choices need to be made about what broad routine to invoke in the first place, and a whole series of choices need to
be made along the way in operation of the routine. However, under the theory put forth here, given a particular objective and the context for its pursuit, these choices are highly
focused and, to a considerable extent, are made routinely, i.e. without much conscious thinking.
Thus, to return to our cake making example, a given cake recipe — a routine for making a cake — generally allows the mixing to be done with a hand or electric mixer. Margarine
may generally be substituted for butter. An individual cook may use a little bit less of this, and add some of that, without breaking very far from the recipe. Making a chocolate cake
involves basically the same recipe as making a vanilla cake, except for a few inputs and steps. Thus, there is room within a routine for variation, perhaps motivated by particular
tastes, or the kind of cake the cook deems appropriate under the circumstances it is a birthday cake and the birthday child likes vanilla, or the skill and experience of the cook,
or input availabilities there is margarine but not butter in the refrigerator, perhaps by input
R.R. Nelson, B.N. Sampat J. of Economic Behavior Org. 44 2001 31–54 43
prices butter is very costly these days. Many cake makers have their own particular secrets that they regard as contributing to superior products.
However, one important aspect of many productive routines we want to highlight here is that, while the particular operation of a routine by a competent individual or organization
generally involves certain idiosyncratic elements, at its core almost always are elements that are broadly similar to what other competent parties would do in the same context. By
and large the ingredients and the equipment used by reasonably skilled cooks are basically the same as those used by other skilled cake makers. And the broad outline of the steps
generally can be recognized by someone skilled in the art as being roughly those described in “The Joy of Cooking”, or some comparable reference.
As the example suggests, the latter aspect of a routine, the part that is broadly familiar to all those skilled in the art, tends to be associated with a title or name, and with written or
otherwise codified descriptions and explanations of how it is done. It may also be associated with a positive theory purporting to explain why the routine works, and a normative argument
about why it is appropriate in the context. The ability to name what one is doing, explain the procedure in a reasonably articulate way, and to provide reasons for it, is a principal
difference between skilled human behavior, and skilled behavior of non-human animals. This general characteristic of widely used routines is, we will argue, particularly important
for social technologies.
We do not play down that, almost always, a nontrivial part of what is involved in per- forming routines may not be explainable in a way that completely permits someone who is
not already familiar with the practice to “do it” without a lot of learning by doing. Michael Polanyi’s point about the tacitness of much of human knowledge is highly relevant. Further,
while some routines as the use of rDNA techniques in doing genetic research are backed by a sophisticated scientific understanding, in many cases the “explanation” for why some-
thing works may be more folklore than science consider the rationales for certain steps in a cake recipe. In some cases, the normative argument for using it in a certain context
may be nothing more than the proposition that it is the most effective way to do something; in other cases, the reasons for use of the routine may include preservation or furtherance
of important interests or values. In fact, routines differ enormously in the degree to which they are articulated, the extent to which they are understood in a scientific sense, and in the
strength and nature of the values at stake.
However, in any case, a key characteristic of most routines that are used extensively in an economy is that, in their broad outlines at least, they are widely known and employed by
those skilled in the art. And this is not just happenstance, or the result of separate individual learning experiences that lead to the same learned actions. The standard elements of widely
used routines are standard because they are culturally shared.
Particular individual and organizational actors need to have mastery over these culturally shared aspects, in order to operate effectively, for several reasons. First, great cake recipes,
or effective ways of organizing bakeries, or for producing steel or semiconductors, tend to be the result of the cumulative contributions of many parties, often operating over many
generations. This is a central reason why they are as effective as they are.
A second reason why individual persons and organizations wanting to operate effectively in a particular arena need to tap into the public aspects of the relevant routines is that, as
we noted, particular routines tend to be part of systems of routines. The inputs needed
44 R.R. Nelson, B.N. Sampat J. of Economic Behavior Org. 44 2001 31–54
for them tend to be available, routinely. If help is needed, it generally is easy to get help from someone who already knows a lot of what is needed, and to explain the particulars in
common language, etc. As a special aspect of the above, but a central one for this discussion, for activities
requiring effective interaction among different parties, mutual knowledge about and use of the standard appropriate meshed routines may be essential for coordination the be achieved.
This observation leads us naturally into our discussion of social technologies.
4.1. Physical and social technologies as constraints and as productive pathways We now would like to propose that the program built into a routine, generally involves two
different aspects: a recipe that is anonymous regarding any division of labor, and a division of labor plus a mode of coordination. We propose that the former is what scholars often
have in mind when they think of “technology” in the conventional sense; we will call this aspect of a routine the “physical” technology involved. And we will call the latter aspect,
that which involves the coordination of human action, the “social” technology involved.
From one point of view, prevailing physical and social technology limit choices regarding how to do things. By “limit” here, we mean a soft set of constraints, not a hard one. Earlier we
noted that different practitioners will use physical or hard technologies, like cake recipes, in different ways. Different contexts will induce different variants. However, to use a physical
technology completely different from what professionals in the field are familiar with and have developed cumulatively over the years involves not taking advantage of that social
learning. Available inputs — machinery and materials — generally are tailored for use in prevailing routines, and to try to do something significantly different may require hand
crafting the inputs, perhaps at considerable cost and risk of failure.
On the other hand, as Schumpeter 1934 argued years ago, breaking from prevailing routines is exactly what innovation is all about. Continuing economic progress is impossible
without it. But innovation is risky for exactly the reasons just put forth. We propose that the situation is similar regarding the aspects of a routine that involve
division of labor and coordination mechanisms. Individual organizations operating a partic- ular routine inevitably will differ in how labor is divided and work coordinated, both within
the particular organization in question, and across the borders of the organization, just as they will differ in the details of the physical technology employed. These differences may
reflect variations in opportunities and contexts. As circumstances change, a particular orga- nization may modify its ways of doing things in ways that are responsive to those changes.
However, there are a lot of advantages in abiding by at least the broad outlines of prevailing and generally accepted “modes of organizing work“ and “appropriate practice”, and not
taking a route that is deemed strange or inappropriate to those who have to be involved. In a sense, standardized social technologies themselves can take on the character of norms a
la some of the game theoretical literature surveyed above.
On the other hand, generally accepted social technologies, institutions, may be highly inefficient compared with other ways of organizing transactions, should these be effectively
implemented. In particular, prevailing institutions may not work well with new physical technologies, or to cope with new conditions of demand and scarcity. But institutional
innovation, like innovation in physical technologies, is risky.
R.R. Nelson, B.N. Sampat J. of Economic Behavior Org. 44 2001 31–54 45
There is widespread recognition that powerful “physical technologies” generally are involved centrally in productive routines. Under neoclassical theory, at least there has been
less explicit and systematic reflection on the roles of effective “social technologies” in productive activity, although as we have noted this is what much of the new discussion of
institutions seems to be mostly about. This is our focus here.
It is apparent that “knowing” prevailing social technologies, and what they allow and deny, and how to operate within them, is just as important as “knowing” available physical
technologies in determining the available range of “choice” facing a particular actor. Thus, in the cake making example, in this society at least sugar and flour tend to be available at
one kind of store, which may or may not also sell mixing devices, but almost never stoves. Stoves are available at a different kind of store. What different kinds of stores provide,
and how one gets to obtain merchandise from them, define a good part of the institutional context for cake making. To be an effective cake maker, one needs to know not only the
recipes but also how to get the right ingredients.
That knowledge, and the prevailing social technology in this context, of course involves much more than who sells what, but also matters of law and law enforcement, and cus-
tomary practice. To take merchandise from a store without paying for it is a crime. Cash is legal tender for purchase, but the custom may be for particular kinds of stores also to
accept personal checks, or credit cards. Thus, knowledge of “background factors” and of social technologies employed by others affect the choice of social technologies available
for shopping. Indeed, an important reason for relying on standardized social technologies is that actors can draw on cumulative public knowledge useful for the operation of these
routines.
In these examples, prevailing institutions have been defined in terms of generally em- ployed ways to get things done where the doing involves coordinating the actions of in-
dependent individuals or organizations. In stripped down neoclassical economics, these mechanisms are often subsumed under the concept of “markets”. The discussion above
aims to unpack the market concept and make it something that can be modeled as a set of processes or routines. A well worked out routines model of a market would incorporate
how prices are set, and how prices affect the details of what is done by actors buying and selling in that market. But it would involve a considerable amount of other “institutional”
detail as well.
The fact that some social technologies are standardized — that is, they are institutions — also constrains effective routines within organizations. Thus, in any era in any country or at
least within particular sub-cultures there are some widely held notions about how a bakery should be run which, if violated, might make it difficult to get regulatory clearance, or
bank credit, and notions about appropriate job classifications and payment that, if violated, could cause labor trouble. Again, this is a case of the institutionalized social technologies
themselves taking on the character of norms.
Broad organizational forms can be thought of as institutions, to the extent that they define or induce particular social technologies which are thought of as the appropriate
ways to organize economic activity. Thus, Ford’s organization of mass production provided a model followed by many companies engaged in producing assembled products which
was for many years considered the norm. Presently, Toyota style “lean production” now is the vogue. In both cases, at least the broad outlines of the organizational format became
46 R.R. Nelson, B.N. Sampat J. of Economic Behavior Org. 44 2001 31–54
well-known, if not always easy to make work in practice. In both cases, a broad “theory” about why the mode was efficient came to be widely articulated and accepted. That is, these
forms were “institutions”, or generally available “social technologies”. While our focus here is on “economic” institutions, or more generally institutions that
mold economic performance, not political ones per se, it is clear that political institutions play an important role in economic performance. The way management and labor negotiate,
or fight, about wages and work rules, is a good example. These procedures tend to be highly patterned, that is institutionalized, if with a significant stochastic element. In turn, these
patterns of interaction are molded by a body of formal law, which in turn is the result of how a nation’s political institutions grind out legal resolutions to the demands of competing
interests. Does the labor union have to vote on a contact negotiated by it’s representatives and management? Will a passionate minority accept the decision of a majority? In many
cases, prevailing social technologies need to be understood as reflecting a kind of truce between different interests. Names, and shared understandings, clearly are vital aspects of
social technologies. So too, in many cases, are rationales for what is done.
As the examples indicate, generally employed social technologies — institutions — differ in the extent to which they are supported by norms and values. Some, like the institutions of
collective bargaining, may be powerfully supported by interests that argue that prevailing practice is right and proper, and to deviate would break a moral bargain. Others, like whether
a grocery store sells hardware, may carry very little moral load.
“Institutions”, both those that define what in a simpler conception would be called mar- kets, and those that mold intra-organizational activity, can be very complex and intertwined.
Thus, consider what is involved in the design and development of modern aircraft. One ob- serves that these activities tend to proceed in quite similar ways, regardless of the company
where they are undertaken. The nature of the division of labor and the modes of coordi- nation that have in the past proved effective are widely known in the trade. In turn, that
division of labor is molded, and constrained, by the nature of prevailing scientific and en- gineering disciplines. Engineering schools reflect and enforce this division. While there is
overlap, electrical engineers are trained in one set of subjects and aeronautical engineers in another.
Because of this, firms know “the kind of engineer to hire” when they need someone to do a particular kind of job, and they know how to locate that new employee within the
prevailing framework of work. The nature of the job market is molded as well by such “institutions” as the meetings of professional societies, which serve as a meeting ground for
employers looking for people and engineers looking for jobs, and also by broadly accepted rules regarding when it is and when it is not legitimate to jump from one employer to
another, the mechanisms by which salaries are bargained out, and the like.
We are not arguing, of course, that all companies organize to design planes in exactly the same way, or that every person with a degree in electrical engineering knows the same thing,
or that all engineering schools divide the turf the same way. There clearly are non-trivial differences, across societies, between firms in a given society, and even among projects
within a firm. And there is change, often significant change, over time. But at a given time within a particular society there tends to be certain reasonably well established practices
in these arenas. Major deviation from them is, at the least, cause for notice and surprise, and likely will lead to inadequate outcomes. That is, the design of aircraft, the structure of
R.R. Nelson, B.N. Sampat J. of Economic Behavior Org. 44 2001 31–54 47
technical professions, the division of fields in engineering schools, and the structure of the job market for engineers, all are institutionalized.
As we noted, social technologies become institutionalized through a variety of different mechanisms. But given that they are institutions define and provide low transaction cost
ways of doing things that require coordinated interaction with other parties. This is not to say that one cannot organize the division of labor and inter-party coordination through means
that are not institutionalized. But the transaction costs of so doing may be much higher. An “institution” is like a paved road across a swamp. To say that the location of the prevailing
road is a “constraint” on getting across is, basically, to miss the point. Without a road getting across would be impossible, or at least much harder. Developing an institutionalized way
of doing something may be the only way to achieve a low transaction cost way of doing it.
5. Institutions in a theory of economic growth
