hagedorn_paper about Integrative Institutions

8/7/2019 hagedorn_paper about Integrative Institutions

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The Dichotomy of Segregative and Integrative Institutionsand its Particular Importance for Sustainable Resource Use

and Rural Development

Konrad Hagedorn

Humboldt University BerlinChair of Resource Economics

Luisenstrasse 56, 10099 Berlin, Germany

Phone: + 49-30-2093 6305, Fax: +49-30-2093 6497E-mail: [email protected]/wisola/fg/ress/

2005 Konrad Hagedorn

Paper to be presented at theWorkshop in Political Theory and Policy Analysis

Colloquium Mini Series,Bloomington

October 20, 2005(Second draft)

1 IntroductionDuring the last decade it has become more and more clear that achieving sustainability is

primarily a question of institutional change. At the same time, there is increasing evidencethat this process will lead to a higher degree of institutional diversity (Ostrom, 2005) and tomore complex governance structures (McGinnis, 2002). In line with these ideas, the there isa growing awareness of the analytical limits of concepts which frame problems of coordina-tion within a "market or state" dichotomy (Ostrom 1990). The author of this paper has elabo-rated a framework for the Analysis of Institutions of Sustainability (IoS) that has been ap-plied in several studies. The application has led to new insights as regards the particular fea-tures of institutions supportive to sustainable development. In this way, it has raised thequestion What is special about those institutions which bring about sustainability? Is there aspecial class of institutions predominantly relevant for solving sustainability problems?

In the theory of institutions, many categories and definitions regarding institutions and gov-ernance structures have been created. What classes and types of institutions are used in thevarious institutional approaches often depends on the discipline of social sciences they origi-nate from and the authors who have different notions of the institutional world and differentpreferences regarding the suitability of terms. Most institutional scientists distinguish betweeninstitutions as rules and governance structures as the organisational solutions for makingrules effective (e.g. Ostrom 1990, North 1990, Bromley 1992). In contrast, others maintainthat the term institutions covers both rules and organisations. For example, Williamson(2000) has introduced the terms institutional environment and institutional arrangements,the latter being more or less identical with governance structures and the first covering a


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subset of rules that includes only the formal ones. In his four levels of social analysis heattributes informal institutions to the level of embeddedness in social traditions and norms.

Homann goes beyond the notion of institutions as single rules and at the same time ex-plains its difference to norms: Institutions are distinguished from norms by the fact thatnorms determine single actions, while institutions are understood as being systems of normsor rules which give order to whole complexes of actions and interactions in a way that stabi-

lises expectations. This implies that single norms may change without the institution it be-longs to, for example a market, also having to change. In this sense institutions are a meta-arrangement to norms Homann (1999: 52f.; translation from German by the author). Institu-tions consist of abstract rules and not of individuals which are members of groups or com-munities. A family can mean both a group and an institution, but in the latter case the per-spective is different. This also applies to organisations like parties, bureaucracies and firmswhich are formed by positions and have the role of collective actors in societies. Institutionsseem to be closer to what the sociological systems theory conceives of social functions sys-tems for which typically the economy, the legal system, science and politics are mentionedas examples (Luhmann, 1984; 1997). However, appearances are deceiving. These subsys-tems of society are indicated by its functions and by codes, programmes and eventually me-dia. In contrast, institutions like private property and the family go across the borders of thesesystems and are determined from a different perspective (Homann, 1999: 52; translation

from German by the author). He also disagrees to defining institutions by their purpose orfunction but prefers to understand an institution only as a being a set of rules.

Furthermore, distinguishing between formal and informal rules is certainly very popular, butit is often not clear how to draw a line between them. Are formal institutions those which aresomewhere written, or should we prefer a more thoughtful definition that calls formal institu-tions those which are explicit in the perception of the actors following these rules, and thosewhich are implicit, informal rules (see, Theory of Conventions; e.g., Morand and Barzmann,2004)? Very plausible are differentiations of rules according to levels of decision making andsocial interaction, as suggested by Ostrom, 1998; Kiser and Ostrom, 2000). They distinguishbetween meta-constitutional, constitutional, collective choice and operational rules). In thispaper we will not draw a clean line between institutions, organization or governance struc-tures. Rather we will treat them as elements of societies system of rules which affect different

levels of decision making. This is a very similar understanding of institutions as the one sug-gested by Kiser and Ostrom (2000).

In this paper, a concept for the analysis of institutions that promote sustainability and a newdichotomy along which we can distinguish sets of rules will be introduced. This is the dichot-omy of Integrative and Segregative Institutions (ISI). In particular, it may be of interest foreconomists who are used to arrange their guiding concepts in dichotomies that define op-tions and alternatives of social organisation. In the past, such a dichotomy was the marketand the state. As the analytical capacity of this traditional dichotomy measured against pre-sent requirements of institutional analysis is insufficient, the author of this paper suggestsreplacing it by integrative and segregative institutions1.

This paper is organised as follows: First the basic ideas of both the analytical framework ofInstitutions of Sustainability (IoS) and the dichotomy of Integrative and Segregative Institu-

tions (ISI) will be briefly outlined (Section 2). Then we will argue that the traditional marketand state dichotomy represents an inadequate concept and terminology for analysing institu-tions of sustainability (Section 3). This requires a dichotomy shift towards integrative andsegregative institutions which is necessary if we take the idea of sustainability seriously (Sec-tion 4). Finally, a proposal is made how to transform the regulative idea sustainability into ameta-constitutional rule that influences institutional change.

1 Some authors use the terms integrating institutions for specific purposes for example for integrating environ-mental policies into the policy making of the EU and its member states (Morand and Barzmann, 2004) or for theanalysis of corruption (Tonoyan, 2003). In this paper, integrative and segregative institutions are consideredas a more general concept for institutional analysis.


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2 Institutions of Sustainability and Integrative versus Segregative Institu-tions

The IoS together with the new dichotomy of integrative versus segregative institutions (ISI)concepts build on the widely agreed convention that institutions are (sets of) rules of interac-tions between individuals and groups and also between more aggregate actors such as na-tions and societies. They shape the relationships between people and, provided that we got

the institutions right, they are embedding actors in such relationships to others that enable asustainable development. To be effective, they must be associated with adequate govern-ance structures and be able to adjust to constantly changing technological and social condi-tions. The established constraints restrict the behaviour of individuals vis-a-vis other indi-viduals, but also provide them with opportunities in social action by defining their legitimatescope of action (room of manoeuvre).

2.1 The Institutions of Sustainability Framework

The basic concept of Institutions of Sustainability was originally focussed on the questionof institutional change in the area of rural resource protection and agri-environmental co-ordination (see Hagedorn et al., 2002). As can be seen from Figure 1, it takes into account

the main determinants, phenomena and outcomes of institutional change: transactions, insti-tutions, actors, governance structures. These categories are linked as follows:

(1) Which institutional arrangements arise, depends on the features and implications of thetransactions related to nature and the ecosystem. This is mainly influenced by the physi-cal properties and material transformations with which environmental goods and bads,benefits and damages are associated. Technological innovation and structural changelead to permanent changes of these properties and transformations.

(2) Simultaneously, institutional change depends on the characteristics and objectives of theactors involved in those transactions. This is not only true for individual actors whosevalues, interests and resources to exert influence (power) are very different, but also forgroups of individuals like communities using organisations and networks to shape institu-tions according to their interest and to solve their conflicts.

(3) The changes in institutions, which result from the two main categories of driving forcesmentioned above, affect the design and allocation of rules at different levels and in par-ticular property rights on ecosystem functions or more precisely, on those cost andbenefit streams which can be attributed to natural capital and ecosystem services. Therules and rights can be defined for numerous ecological properties of a physical piece ofnature, each of them related to particular costs and benefits (and for each of these dif-ferentiated rights components, the institutional design of the right or duty can differ).

(4) Necessarily, such changes in rules, particularly property rights on nature components,are accompanied by corresponding changes in governance structures mainly for tworeasons: first, rules and rights (and duties) on nature components, must be supervisedand sanctioned to become effective instead of only being formal in nature; and secondly,the actors can only make use of their rights and entitlements and will only fulfil their du-

ties and obligations, if transactions are organised and co-ordinated.These processes of (intentional and non-intentional) institutional change take place in ac-

tion arenas which may differ by fields, scales and situations (see Figure 1). It is important tonote, that these attributes of the action arenas may widely differ. For example, the actorsmay be rational planners or fallible learners. The fields of action can be differentiated accord-ing to the physical subjects institutional decisions have to be made on, for example, soil pro-tection or biodiversity conservation. Finally, the action arenas differ very much as regardsspatial and temporal scales.


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DDrriivveerrss ooffIInnssttiittuuttiioonnaall CChhaannggee

Figure 1: Analytical Framework for Institutions of Sustainability - IoS

Institutional and Political Environment

Subarenasorganised according to different

Fields & Scales of Interaction

Scales International

(EU / World)

National

Regional Local, etc.

Action situations

Actors constellations Actors orientations Forms of interaction Interests of actors Knowledge of actors Mental models of actors Identit of actors

Action Arenaswhich differ by fields,

scales and situations

Properties of transactions

Excludability and rivalry Assets specificity Separability Frequency Uncertainty Complexity Heterogeneity

Transactionswith different properties,

simple or complex, visible

or hidden

Characteristics of actors

Values and beliefs Reputation and trustworthi-

ness

Power resources Information and knowledge Methods of action selection Social environment and

embeddedness

Types of governance

Traditional concepts Market Hierarchies,

Hybrid formsAdvanced concepts Polycentricity Co-production Multifunctionality Coo eration

Types of rules

Constitutional rules Collective-choice rules, Operational rules Categories of property

rights and duties

Fields Land, soil Water, flood Air, climate

Biodiversity GMO, etc.

Actorswithdifferent characteristics,trustworthy or opportunistic,

rational or emotional

Institutionsas formal and informal

rules, property rights

and duties

Governance Structuresmaking the rules effective


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2.2 Processes and Effects of Transactions

In the concept developed in this paper, the terms integrative and segregative refer tohow the consequences of decisions made by an actor are dealt with under a set of rules.Those consequences are, as will be explained in detail below, the process of transactionitself, which provokes interdependence between actors, and the effects of transactions in-cluding the distributional conflicts they may raise among them. Integrative and segregative

do not focus on the question whether or not actors can be included in or excluded from or-ganisations like markets, bureaucracies and cooperatives. Accordingly, the term integrativedoes not refer to the includability of an individual into collective action formed under coopera-tive governance for the production of a common good, service or resource, and the termsegregative does not refer to the excludability of an individual from the use of a privategood, service or resource under market governance. This does mean not that such proc-esses cannot originate from the impact of integrative or segregative institutions. For example,if the effects of transactions are widespread they may affect many people, and this may implythat integrative institutions for covering most of these effects also must include many people.Nevertheless, the starting point is processes and effects of transactions.

We have not clarified the question up to now whether the integration or segregation alwayshappens directly by the institutions or by governance structures which make institutions ef-fective. The same set of rules can often be put into practice by several types or combinationsof governance structures which may differ with regard to their integrative or segregative im-pact of those decisions they are expected to govern. For example, the market position offarmers can be protected by antitrust laws (a set of rules) but also by a system of coopera-tives (a governance structure). In the latter case, property rights on the farmers assets re-main rather segregative (e.g., private property rights in land), but a collective form of organi-sation integrates a beneficial effect of farmers market transactions into their own domain market power. However, one could argue that establishing this governance structure mayleave those property rights untouched but requires a new set of rules that enable coopera-tion. Thus, we can suppose that integration and segregation can be achieved with differentkinds of rules and at different levels of rule making. In this paper we will not explore thisquestion in more detail although this would certainly be relevant.

A framework for the analysis of institutional change which focuses on sets of rules and

governance structures for sustainability must emphasise the properties of transactions. Thismakes it different from some institutional concepts in political science where the focus is onthe characteristics of actors and their relations (see, e.g., actors centred institutionalism;Scharpf). The reason for this is that sustainability is closely related to the physical world.Here the physical nature of transactions is relevant for institutional choice. However, whendeveloping a framework for analysing or even designing institutions of sustainability, we arenot equally interested in all kinds of (physical) transactions, but particularly in those which arerelated to natural resources and ecological systems. This distinguishes the IoS frameworkfrom conventional transaction cost economics (Williamson) which has been developedagainst the background of transferring commodities (goods mostly produced by means ofengineered processes). In our case, non-commodities are at stake; that means goods, ser-vices and resources which are received through those processes of self-organisation whichare typical for ecosystems and only to a limited extent influenced by humans.

If we accept that analysis of institutional change not always must pay equal attention toboth transactions and actors, we may consider concentrating on only one of these aspects:

1. For emphasising the relevance of transaction properties for institutional change, charac-teristics of actors could be subjected to the ceteris paribus condition. In this case, the di-versity of actors is blinded out; we assume that only standard actors are involved.

2. For emphasising the influence of actor characteristics on institutional change, propertiesof transaction could be subjected to the ceteris paribus condition. In this case, the diver-sity of actors is neglected; we assume that only standard transactions take place.


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Although we clearly take the first view in this paper, we have to resist the temptation of actu-ally setting the characteristics of actors ceteris paribus. This is because any concept oftransaction must sooner or later take into account transaction costs (and transaction bene-fits). Transaction costs, for example costs of information or negotiation, clearly result fromintended, ongoing or past transactions which have affected different actors. In other words,transactions reveal interdependence between actors. Interdependence occurs when achoice of one agent influences that one of another . Interdependent agents cannot simul-taneously realise their incompatible interests in scarce environmental resources and theirconflicts must be resolved by defining (or redefining) initial endowments (Paavola andAdger, 2005: 355). Strictly speaking, transaction costs do not result from the physical proce-dure of transferring a unit of a good, service or resource from one point to another, but fromhow the actors involved prepare for or respond to this physical change by communication.Accordingly, transaction costs could also be called interdependence costs (though we willcontinue to use the term transaction costs in this paper). Obviously, we deal with a phe-nomenon in which the physical and the social dimensions are closely intertwined. Interde-pendence has two distinct sources: the attributes of the resource and the attributes of theuser (Paavola and Adger, 2005: 356).

Let us take a closer look at the transactions. They represent the economic side (often beingrelated to physical and ecological objects) of the interactions regularised by institutions, par-

ticularly in those cases where interactions refer to scarce goods and services. When lookingat the main aspects associated with transactions we exclude the causalities why a certaintransaction takes place. These are enclosed in the production function which reflects factorslike factors supply, product demand, state of technology and knowledge available. Whenlooking at transactions in this way, three main phenomena seem to be relevant:

1. The properties of the good or the resource being transferred: These are not important perse but only when it comes to a transaction of a unit of the good or resource. For example,the toxic influence of nitrate in groundwater on babies only exists if somebody causes ofpositive nitrogen balance, for example by excessive fertilising with nitrogen. Or physicalopen access to common grassland only leads to degradation when pastoralists actuallyuse and overuse this land. However, transactions are usually not only influenced by theparticular good or resource in question, but also by other goods, resources and physical

circumstances. For example, nitrogen leaching depends much on the soil quality andgeological conditions. Whether overgrazing becomes a problem differs between yearsbecause of changes in weather and climate.

2. The process of transaction by which the good or resource is transferred: In New Institu-tional Economics, a transaction is defined by means of a technically separable interfacewhere one stage of activity terminates in a system of production and provision and an-other one begins. A transaction may be simple, for example, if only one physical entitythat is homogenous and visible, has clear boundaries and is not connected with any non-intended effects and implications is concerned (like selling bricks). But transactions mayalso be complex, for example, non-visible, without clear boundaries, showing physicalheterogeneity, consisting of many sub-units and dimensions, involving numerous actors,causing diverse and often hidden side effects and causing even impacts over a long timethat may be even affect future generations (for properties of transactions see also Sec-

tion 3.2). As transparency of such transactions would require much knowledge and in-formation, they are usually connected with insecurity and risks for the actors involved.This knowledge problem is more crucial for ecological systems than for production sys-tems. Systems of production are engineered systems that are modularibly comprehen-sible, and only decomposable systems can be simple. Transactions related to naturalsystems are complex, often not standardised, even unknown. Transaction impacts maygo unseen with hidden causalities. Accordingly, the physical properties of transactionsand the interdependence between actors caused by them may differ considerably. Thisleads to very different conclusions regarding the question whether segregation works orsome or even much integration is required as shown in Table 1.


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Table 1: Processes of Transactions and Interdependence: integration and segregation

Properties of transactionsInterdependencecaused by transactions Simple, engineered Complex, ecological

Harmony, sufficientsocial capital Segregation works,no integration required Segregation creates problems,some integration required

Dissension, lackingsocial capital

Segregation creates problems,some integration required

Segregation causes conflicts,much integration required

3. The effects of transaction on costs and benefits of actors: Similar to the process of trans-action, also the effects of transaction are different. This applies to mainly two categoriesof effects, first the burdens and benefits the interdependence between actors causes inthe process of the transaction, and secondly the final results of the transaction consistingof beneficial and adverse effects. As indicated in Table 2, the outcomes in terms of theadequacy of segregration and the necessity of integration are similar to those in Table 1.

Table 2: Effects of Transactions and Interdependence: integration and segregation

Results from transactionsBurdens or benefitsby interdependence Few, similar Numerous, divers

Easy, not costly, evencreates extra benefits

Segregation works,no integration required

Segregation works insufficiently,some integration required

Difficult, very costly,represents a burden

Segregation works insufficiently,some integration required

Segregation leads to conflicts,much integration required

Many transactions which must be regularised by rules and governance structures have be-come very complex, in particular, if they are related to engineered production and distributionbut to self-organising eco-systems. In such cases, the following two questions are relevant:

(1) What kind of impact of his or her activities is an actor expected to take into account?This refers to both costs of interdependence in the process of transaction and final bene-ficial and adverse effects: To what extent is internalisation of transaction cost compulsoryand how much externalisation of transaction cost is tolerated? Which process yieldingbeneficial effects is an actor permitted to initiate and to appropriate the positive results,and which adverse effects is an actor allowed to cause and to leave the negative out-comes to others? As there is no full information and complete transparency on many ef-

fects which will materialise in the process of a transaction, for example during the produc-tion and provision of a collective good, it is important at which stage of the process enti-tlements to beneficial effects or liability for adverse effects becomes effective (see alsoSection 4.1). In particular, when innovations which are associated with a high degree ofinsecurity are implemented, this issue is relevant.

(2) What institutions (and governance structures) are able to select and attribute the transac-tion costs, adverse and beneficial effects mentioned above to those eligible or responsi-ble in a precise and reliable way? Not only single rules, but arrangements of differentrules and combinations of different types of governance may be necessary for this pur-pose. Individuals may like to exploit benefits, avoid cost, and to reduce complexity. But


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the social choice situation is different and implies balancing cost and benefits for society.This is what proper institutions are expected to achieve: balance cost and benefits, ac-cord with norms, redistribute responsibility. At this point, also the concept of polycentricitybecomes relevant.

2.3 An Operational Definition of Integrative and Segregative InstitutionsFrom these general notions we can now derive an operational definition of integrative and

segregative institutions. It seems plausible that this definition has to be derived from the im-pacts these institutions produce for the actors involved (see Table 1). The frame of referencewe use for describing and ordering the impact of these institutions implies a normative de-mand: Those who have caused costs should also bear these costs, and benefits should ac-crue to those actors who have produced them. Although this is a very simple and widely ac-cepted principle of fairness, it is far from being sufficient for evaluating the legitimacy of insti-tutions. Doing this requires sophisticated theories such as the approach on the legitimisationof institutions developed by Homann (1999). In this paper, we bypass this differentiated dis-cussion on legitimisation concepts for institutions and continue clarifying the integrative-segregative perspective.

Table 3: Consequences of Integrative and Segregative Institutions

Integrative institutions Segregative institutions

Processes of Transactions and Interdependence

Internalising transaction/interdependence costs

Obligation to internalise Incomplete obligation to internalise

Externalising transaction/interdependence costs

No right to externalise Some rights to externalise

Effects of Transactions and Interdependence

Beneficial effects Appropriate all benefits Focus activity, forego some bene-fits, leave some to others

Adverse effects Accept all responsibility Deny complete responsibility,shift part of it to others

(A) Integrative institutions allow actors, who make decisions on transactions, not only to profitfrom beneficial effects, but they also hold them fully responsible for adverse effects. Simi-larly, they not only force them to internalise the transaction costs they cause, but also

protect them against transaction cost resulting from the activities of other agents. Deci-sion makers enjoy most of the benefits and bear most of the costs of their own decisions.

(B) Segregative institutions force actors who make decisions on transactions to focus andrefrain from receiving some beneficial effects, but also allow them to shift some of theburdens resulting from adverse effects to other actors. They may externalise transactioncosts within limits, but can also not avoid bearing transaction cost which should rather beattributed to other agent. To a certain extent, decision makers forego benefits and avoidcosts although they have caused them, and actors who have not participated in decisionmaking will have costs and enjoy benefits.


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In other words, integrative and segregative institutions establish different incentive struc-tures which, over time, lead to different actor orientations and economic behaviour. Integra-tive institutions require learning processes on how to organise "the whole, while segregativeinstitutions induce learning processes including only a part of the bundle of effects of thetransactions concerned. The same applies to the perceptions and motivations actors de-velop. In other words, integrative institutions co-ordinate decision making by means of a "sys-tem approach" to learning and knowledge dissemination. Segregative institutions coordinatedecision making by means of a "part of the system-approach" to learning and knowledgedissemination. This has consequences for the speed of change and the ways in which thebenefits of changes can be appropriated by single actors.

Since institutions are supposed to reduce complexity in social interaction, they are alwayssomehow integrative and segregative at the same time. On the one hand, they are integrat-ing the interests of those who want to be protected against adverse effects into the decisionmaking of other actors by exposing these to corresponding constraints. On the other hand,they secure a reasonable room of manoeuvre for a decision maker, even if this may requirethat not all adverse effects he causes are kept away from other actors. Accordingly, we couldalso speak of institutions which are more/less integrative and institutions which are more/lesssegregative in nature. Strictly speaking, a frame of reference is necessary for making precisestatements on which institutions should be called integrative and which segregative. The

Sustainable Area of Social Relationships which will be defined in Section 4 could serve thispurpose.

3 The Market and State Dichotomy

In economics we are used to a dichotomy that sounds similar to the integrative versus seg-regative institutions concept but is less universal and appropriate for present problems, be-cause it does not refer to a result-oriented definition of classes of institutions but to two se-lected and concrete types of governance: the market and the state. This is the first reasonwhy the concept is not neutral but biased. The second reason for this is that this conceptusually implies a particular hierarchy: The market as a superior institution is expected to or-ganise all transactions, and only if it fails, the state as an inferior institution is supposed to

play a role.

3.1 Market Failure

This leads us to a few very important terms used in economics: market failure and exter-nalities. The term market failure is used to suggest that, in principle, the market should beable to cope with all tasks of coordination. However, this view is prone to failure from thebeginning. How could we expect that only one institution (and type of governance) could beable to arrange all interactions and transactions properly, if we take into account the com-plexity of social relations, modern technologies and economic transactions? Nevertheless,the mode of operation and the institutional capacity of markets are measured against thefictitious ideal of a co-ordination mechanism which is able to work perfectly and can be used

without any costs. Such an institution, provided that it could actually exist in the real world,would be able to co-ordinate all processes of re-allocation associated with structural changeof agriculture without any transaction costs However, the diagnosis of failure or insufficien-cies of markets and competition actually serves as a basis for legitimising political therapies,in the most extreme case for justifying constitutional exemptions. De facto a choice betweenalternative institutions takes place, which could only be substantiated by really comparingthese alternatives as regards their typical transaction costs and transaction benefits that arerelated to their integrative capacities as shown in Figure 2.

Obviously, the view that markets are prone to failure is implicitly based on a comparisonwith a perfect mode of operation of these institutions which hardly occurs in reality. Further-more, it is implicitly assumed that they can actually be replaced by never failing political


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processes and instruments. However, this notion of politics based on pure instrumental ra-tionality has convincingly been criticised by public choice theorists who have stated that thiswould imply a "benevolent dictator. As a consequence, proponents of that view soon dis-covered policy failure, what is more or less predetermined by the logic of the concept. Thediscovery of policy failure has obviously motivated many liberal economists to resort to thehealing powers of the market again. The unrealistic notions of the co-ordination capacity ofthese two institutions obviously lead to an oscillation between extremes and reasoning inextremes, instead of starting with a realistic institutional analysis that recognises the diversityof institutions and governance structures and not only argues in terms of Market and State.

As Eickhof (1984: 4ff.; 1986a: 468ff.; 1986b: 124ff.) has pointed out, the term market fail-ure has insufficiently been defined, and its economic meaning is not clearly understood.Accordingly, economists often talk about market failure although the market in a realistic viewis working properly. This is due to the fact that an idealised mode of operation is taken as aframe of reference, and this implies that the actual performance of markets must more orless differ from this idealised norm. Such a comparison, which Demsetz (1969: 1) has termedthe Nirvana Approach, in fact focuses on the difference between reality and a blissful finalstate, but doesnt say anything about reality and what can be achieved under realistic prem-ises (Eickhof 1986a: 468f.). Although such a concept only enables unacceptable compari-sons between notional ideal types and concrete real types of institutions, they are frequently

used to justify exemptions from the constitutional rules of competition, which automaticallyleads to government regulation. Where the invisible hand of competition is said not to beeffective due to alleged insufficiencies, it must be replaced by the visible hand of govern-ment (Eickhof 1983: 2; 1985: 64).

For these reasons, an adequate definition of market failure can only be based on actuallyachievable and empirically observable modes of operation of markets and competition. Thiscriticism also maintained by Eickhof (1986a: 469; 1986b: 126) leads to two important conclu-sions:

As long as the diagnosis of market and competition failures is based on a frame of refer-ence that pretends these institutions could function perfectly and co-ordinate all economictransactions, we must inevitably arrive at an ubiquity of market failure. This is a cognitivebarrier to a reliable assessment of the coordination capacity of markets as compared to

other governance structures. The notion that the market, in case it fails, should (and can) be replaced by only one al-

ternative, the state, neglects the fact that the organisation of modern societies has be-come much more complex and heterogeneous. In other words, it is a cognitive barrier torecognising and searching for diverse institutions and governance structures that wouldbe better adjusted to the plurality of transaction and interaction, and to finding necessarypolycentric structures and relationships.

3.2 Externalities and Public Goods

The way the term externality or externalities is used in economics is closely related to

the notion of market failure outlined above. In fact, the question arises as to external towhat the phenomena called externalities are thought to be. That there are effects that areactually external to the market cannot perceived of as a surprise, provided that we do notassume that this type of governance structure should be able to solve all sorts of co-ordination tasks. If they are assumed to be external to all existing institutions they can nolonger be interpreted as market externalities. In this case, institutional economists usuallyuse the term open access. Usually, discourses on externalities also reveal that most peo-ple share the expectation that they should be internalised. Strictly speaking, shared ex-pectations of this sort already represent rules, at least informal ones, although these rulesmay still lack sufficient formalisation and implementation.


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At first glance, everybody might agree that institutions should be more integrative in natureif they are supposed to be in line with the principle of sustainability. Inappropriate agriculturalpractices that do not integrate concerns for nature conservation may endanger the resilienceof eco-systems. Excessive energy consumption is detrimental to the stability of the globalclimate, because it does not internalise the greenhouse effects. Profit-oriented tourism maydestroy rural cultures if it does not take into account its impact on rural society. Many exam-ples of this sort which call for integrative institutions could be collected. Dalys (1990) plea forrecognising the complementary of man-made and natural capital is nothing else than a rec-ommendation of an integrative strategy.

4.1 Balancing and Sequencing the Impact of Integrative and Segregative Institu-

tions

However, an analytical framework focussing on integrative and segregative institutionsmust be able to produce a more balanced assessment. It can easily be understood, that atoo high demand for integration may cause considerable disadvantages. For example, anentrepreneur who wants to apply a new technology faces the problem that it is more or lessunknown, how serious and costly the side effects of this new technology will be, and to whom

these side effects will accrue. If society holds him responsible for all possible side effects, hewill hesitate to make use of the innovation because his liability could ruin his firm in the fu-ture. If many or all entrepreneurs respond in this way, neither they themselves nor societyand politicians will learn fast enough about the real progress and dangers associated with anew technology. Simultaneously, society will forego potential gains in welfare from the inno-vation process. Obviously, it can be reasonable to allow for some segregation in order tomaintain dynamic sufficiency regarding economic and social processes.

As already mentioned in Section 2.2, it is not negligible at what phase in processes of deci-sion making on activities of planning, production, marketing, provision, etc. integrative andsegregative institutions become effective. In the centrally planned economies of the formersocialist countries, for example, rules for income distribution and social security were inte-grated too early in the economic process, i.e. already in the production and provision activi-ties. Due to the resulting distortion of economic incentives, losses of efficiency were caused.In social market economies, rules for the same purpose are more segregated from the do-main of production and provision, and its burdens become effective after income has beengenerated. This example shows the importance of not only balancing but also sequencingthe impact of integration and segregation.

To put it another way, both integrative and segregative institutions usually cause both pri-vate costs for the decision makers and social costs. These costs are, of course, not equal inall cases, but depend on the properties of the particular transactions and the characteristicsof the actors involved, as explained in Section 3 (see also Hagedorn et al., 2002). Accord-ingly, the costs of integration are a function of the various properties of the transactions andcharacteristics of the actors:

(1) CI = f (PTi; CAj)

Similarly, the costs of segregation depend on these factors:

(2) CS = f (PTi; CAj)


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We will call the sum of costs of integration and costs of segregation the costs of embed-ding of actors in social relationships:

(3) CE = CI + CS

CI = Cost of integrationCS = Cost of segregationCE = Cost of embedding

PT = Properties (i = 1-n) of the Transaction(s)CA = Characteristics (j = 1-m) of the Actor(s)

It should be noted at this point that both integration and segregation are associated withtwo categories of costs:

(1) Transaction costs: These are the costs of information, co-ordination, negotiation, etc. as-sociated with the processes of transactions and the interdependence between actors pro-voked by the transactions. Both integrating and segregating the effects of a transactioncauses transaction costs. Integration causes transaction costs, for example when roundta-bles are organised to solve conflicts between nature conservation and agriculture or for dis-cussing agri-environmental programmes to be adjusted to the local specificities of the eco-system and farm structures. Transaction costs of integration will increase the more integra-tion is demanded by the existing institutions what requires efforts for implementation (seeFigure 2). Equally, transaction costs of segregation arise, for example when politicians haveto produce plausible justifications for laws allowing excessive energy consumption associ-ated with high greenhouse gas emissions. Transaction costs of segregation will increase themore segregation is admitted by the existing institutions because this burdens the agentswith unresolved conflicts (see Figure 2).

(2) Opportunity costs: These are the benefits of transactions from additional integration (andless segregation) forgone if the rules and governance structures are segregative (rather thanintegrative), and vice versa. As pointed out above, the degree of integration and segregationaffects the benefits of transactions which accrue to the actors. These potential benefits haveto be taken into account as opportunity costs. Benefits from integration which cannot be col-lected due to (segregative) institutional constraints are opportunity costs of segregation, andvice versa. Opportunity costs of integration will increase the more integration is the existing

institutions produce, and opportunity costs of segregation will also increase the more segre-gation the existing institutions allow for (see Figure 2).

(3) Transaction and opportunity costs: As these two cost curves have a similar form, i.e. bothof them normally increase when the degree of integration or segregation grows, they can beaggregated in a plausible way. This similarity of transaction costs and opportunity cost couldhave been shown in separate graphs before aggregating them as done in Figure 2.

If we now start from the principle, that rules have to be agreed upon by the individuals par-ticipating in decision making, we also have to assume that those individuals want to avoidboth the cost caused to them by integrative institutions and those resulting from segregativeinstitutions. (This assumption is in line with the approach of methodological individualism). Asshown in Figure 2, the costs of integrative institutions will increase, if more and more diverseffects of transactions are integrated in the decision making of the actor concerned, which at

the same time causes increasing transaction costs for implementation of the rules. Similarly,the cost of segregative institutions will be the higher the more effects of transactions are seg-regated and thus separated from the decision maker, which at the same time causes in-creasing transaction costs for coping with unresolved conflicts. Figure 2 also shows that thetotal cost including both components tend to increase, if the integrative and segregative as-pects of institutions are in an imbalanced state. To what extent rules and governance struc-tures should either expose an actor to or isolate him from the effects of transactions he orothers have caused represents a basic element of the construction of social relations. There-fore, we call those costs the costs of embedding in social relationships.


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Costs

Institutional settings in which these cost of embedding in social relationships are too highwill not be sustainable. If there is a lack of integration (too much segregation), the social andecological systems will suffer from excessive burdens resulting from non-integrated adverseeffects and will lose their stability or even their capacity of resilience. If the existing rules andgovernance structures demand a too high degree of integration (lack of segregation), societyand economy will lose its dynamic potential and will be unable to achieve the technological

and social adjustments necessary to avoid frictions and crises. This may not only result in adecline of economic welfare but also lead to a loss of stability and coherence in society andcould finally negatively affect the process of civilisation. Similar consequences may arise ifthe sequencing issue already pointed out above is not efficiently solved.

Of course, it has to be found out what too high costs of embedding actually means. This ismatter of knowledge generation, empirical research and social discourse in which politicians,scientists, journalists, writers, administrators, NGOs and other public actors may play astimulating role. This may lead to a better understanding of the threshold of costs of embed-ding beyond which sustainability becomes unlikely (see Figure 2). The Sustainability Area of

Costs of Integration CI

Costs of Embedding CE

( = Total Costs from Integration

and Segregation by Institutions)

Costs of Segregation CS(transaction and opportunity costs)

Costs of Integration CI (transac-tion and opportunity costs)

Costs

Costs of Segregation CS

Unsustainable Sustainable Unsustainable

Threshold

of Sustain-

ability

Sustainability Area of Institu-

tional Embedding

Figure 2: Embedding Actors in Integrative and Segregative Social Relationships pti-


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Institutional Embedding derived from that can be considered as a frame of reference fordetermining when institutions can be called integrative, and when segregative2.

4.2 Plurality and Diversity of Families of Transactions and Families of Actors

Obviously, transactions between actors, due to the diverse and complex properties theyhave, require different kinds and combinations of institutions and governance structures. Inthis respect, some transactions may be more similar, others more different. From this point ofview, it appears instrumental to look for families of transactions, or perhaps more precisely,families of properties of transactions, which fit to certain types of rules and organisation.Such families of transactions may differ with regard to the need for integrative or segregativeinstitutions, i.e. may have different CI and CS curves in Figure 2. Equally, there certainly aredifferent families of actors, or families of characteristics of actors. Also for this case, the inte-grative-segregative dimension may be reflected in different CI and CS curves. The CE curvedepends on the resulting aggregated effects and may have different forms which can be in-terpreted in a way that resembles the interpretations used in the Economic Theory of Consti-tutions (see, for example, Kirsch, 1997):

(1) In those cases where the CE curve in Figure 2 has the form of a U, the integrative-

segregative dimension may be relevant for the design of institutions and governance struc-tures, because the actors are not indifferent as regards different degrees of integration andsegregation.

(2) Whether or not the integrative-segregative dimension is actually relevant, depends on thesustainability threshold and on to what extent the U-shaped CE curve is located above orbelow it, the latter section representing the Sustainability Area of Institutional Embedding.

(3) The more the actors consider the cost of segregation CS important, the more the U, theSustainability Area of Institutional Embedding and the minimum of the costs of embedding Mare located at the left side of Figure 2. Actors want to be well protected against the effects ofa high degree of segregation and accept relatively high levels of integration.

(4) The more the actors consider the cost of integration important, the more the U, the Sus-

tainability Area of Institutional Embedding, and the minimum of the costs of embedding M arelocated at the right side of Figure 2. Actors want to be well protected against the effects of ahigh level of integration and accept relatively high degrees of segregation.

(5) The steeper the slopes of the CI and CS curves are, and the higher the resulting CEcurve in Figure 2, the more costly is it to solve the problem of embedding actors adequatelyin social relationships by choosing the right institutions and governance structures. In suchcases considerable efforts may be necessary to convince people that this is an importanttask and that it will be rewarding to devote some of their resources to institution building3.

(6) The more narrow and skewed the CE curve in Figure 2 is, the more concerned the actorsinvolved will be by the issue of finding effective and efficient rules and organisational solu-tions for sustainability. They consider this an urgent problem because the Sustainability Areaof Institutional Embedding where the costs of embedding are low and do not exceed the Sus-

tainability Threshold is rather small. The more the institutions and governance structures thatemerge unintentionally or have been intentionally designed fail to hit this small corridor, thehigher will be the cost of embedding which the actors have to cope with. In contrast, if the CEcurve is flat, actors are more or less indifferent as regards this question.

2 The solution derived in Figure 2 depends on the assumption that the curves CI, CS and CE are convex. If thisassumption does not apply, making the transaction in question may require extreme rules or even not be feasi-ble.

3 The high input in terms of time and discussion required when establishing institutions by participatory processesmay be a good example for action situations of this sort.


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We have already pointed out in Section 4.1 that the integrative-segregative dichotomy ofinstitutions is of importance for the social organisation of sustainability which requires, in ourterminology, Institutions of Sustainability. The question arises as to how the logical link be-tween ISI and IoS can be conceived of and how this connection can be consistently inte-grated into an analytical framework. For this purpose, the following steps seem appropriate.

We first have to identify those properties of transactions for which the integrative-

segregative dimension is relevant. As it would often be too costly to establish rules and gov-ernance structures especially adjusted to single transactions, families of similar (and possiblycoherent) transactions should be arranged, which match with corresponding types of rulesand organisation (as already mentioned in Section 4.2). As the same is true regarding thecharacteristics of actors, the question of course arises whether analogously designed fami-lies of actors would match with the designed families of transaction. Although it is neitherfeasible nor reasonable to separate actors and the transactions they undertake, they maybelong to families which are not congruent in terms of their institutional fit. If both sorts offamilies do not show the same institutional fit, they would - in an isolated view call for dif-ferent institutions and governance structures. As a consequence, incompatibilities may haveto be overcome by adequate compromises and combinations of - possibly complementary types and elements of institutions and governance structures, and of course also by invent-ing new solutions. This calls for polycentricity and multifunctionality and represents a logical

consequence of the concept of integrative and segregative institutions. For the moment,however, we may be allowed to neglect these rather complicated extensions and to proceedto the next step.

Provided that sufficient information about the various bundles of beneficial and adverse ef-fects of the transactions could be obtained, we may be able to identify costs of integration CIand costs of segregation CS as pointed out in Figure 2. As this would deliver information onthe total costs of embedding CE, discourses and conclusions regarding the SustainabilityArea of Institutional Embedding would be facilitated. Based on the interpretations in Section4.2 of how the relevance of the integrative-segregative dimension for different families oftransactions and different families of actors could be related to the curves reflecting the costsof integration CI and costs of segregation CS and also the total costs of embedding CE,theoretically, the process of institutional choice could be organised as follows (see Figure 3).

1. Select those families of transactions and families of actors where the integrative-segregative dimension is likely to be relevant (see Section 4.2).

2. Identify and discuss the cost of integration CI and the cost of segregation CS and com-pare the costs of embedding CE with the Sustainability Threshold (see Figure 2).

3. Chose from existing or craft new rules that manage to balance the cost and benefits ofintegration and segregation in a way so that total costs comply with the sustainabilitythreshold.

This procedure pointed out here (in a rather simplified way) is outlined in Figure 3. It showsthe (further elaborated) IOS Framework already introduced in Section 2.1, Figure 1 (which iscompatible with the IAD Framework), and emphasises some additional aspects such as (a)the importance of properties of transactions, (b) the necessity of forming families of transac-tion and families of actors and (c) the need for a class of meta-constitutional rules for Sus-

tainability which (d) result from a process of transforming the insights gained through the ISIconcept into a basis for analysis and discourse which can make that regulative idea applica-ble. This raises the question what is meant by this process of making a regulative idea apart of the real world.

5 Sustainability as a Regulative Idea Transformed into a Meta-constitutional Rule

Sustainability is often understood as a policy prescription according to a two stage logic:First, normative premises, that means political objectives, have to be clarified in order to ob-tain criteria for the design of political programmes: Die Zweistufigkeit der gesamten Konzep-


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tion dient letztlich dazu, vorab eine normativ und meist extern begrndete Vorgabe zugewinnen, die eine plausible Handhabe bildet, die individuellen Interessen im Implemen-tierungsprozess zu domestizieren und zu unterdrcken. Diese Strategie scheitert jedochnicht an der Realitt, sondern auch theoretisch, und zwar letztlich an der unzulssigen bertragung des individuellen Handlungsmodells mit vorgegebenen Normen und gegebenenBedingungen auf Problemstrukturen, in denen Normen und entsprechendeHandlungsbedingungen erst noch gesucht und etabliert werden mssen, also aufgesellschaftliche Entwicklungsprozesse (Homann, 1996: 37). Homann also maintains thatthere never will be a satisfactory definition of sustainability. Already searching for such adefinition would be wrong. A reasonable understanding of sustainability can only be achievedafter a long process of searching, learning, and gaining experience, and even then we wouldnever definitely know what sustainability is. He recommends conceiving of sustainability as aregulative Idee bzw. als Heuristik (Homann, 1996: 37) that induces and guides a change ininstitutions. The normative content of that regulative idea is, by solving concrete problems,transformed into incentive structures which provoke modified, i.e. sustainability-oriented be-haviour.

What Homann calls a regulative idea clearly belongs to the meta-constitutional ruleswhich represents an important element in the IAD Framework developed by Ostrom (2005).Such meta-constitutional rules influence the design or emergence of constitutional, collective

choice and operational rules, and the corresponding governance structures closely interre-lated with institutions. Such an impact of sustainability as a regulative idea, however, canhardly be expected as long as it stays an abstract term. To make it practical and applicableto concrete problems, we can make use of the notion explained above that sustainability canbe interpreted as balancing and sequencing the integrative and segregative impacts of insti-tutions and governance structures. By developing conceptions and knowledge about Sus-tainability Thresholds of embedding costs, members of society will be enabled to communi-cate about the Sustainability Area of Institutional Embedding hopefully supported by enlight-ening contributions from scientists. In this way, the regulative Idea sustainability may moreand more become an applicable meta-constitutional rule.

At this point we have constructed the main instruments to interweave the ISI and the IoSconcept. As demonstrated in the left side of Figure 3, among those families having similar

properties of transaction and characteristics of actors there are at least some for which theintegrative-segregative dimension is relevant in terms of costs. This means that in case of animbalanced impact of integrative and segregative institutions these families may face prob-lems of sustainability. This is reflected in those sections of the curve reflecting the costs ofembedding CE in Figure 2 located above the Sustainability Threshold, for example beyondcertain limits of stability or resilience. Accordingly, institutional change should be kept withinthe Sustainability Area of Institutional Embedding indicated in Figure 2. As show in the centreof Figure 3, this area can serve as operational tool for bridging the gap between the regula-tive idea sustainability and social reality by making it an applicable meta-constitutional rule.The left side of Figure 3 shows how this meta-constitutional rule can be put into practice, sothat it can be followed when designing lower-levels rules and governance structures.

Finally the question arises, of what specific nature the influence of the regulative idea sus-tainability on rules and organisation will be. Although this question cannot be answered in

detail, the following considerations seem plausible: In reality those problems for which theintegrative-segregative dimension play a role, that means which may face non-sustainabledevelopments, often refer to transactions which are very complex, extremely heterogeneousand difficult to standardise. The interactions related to these problems and transaction canoften only be governed by institutions and governance structures which are similarly compli-cated, differentiated and adjusted to the specificity of the co-ordination tasks. This substanti-ates the hypothesis that at the level of rules institutional diversity and connectivity, and at thelevel of governance structures polycentricity and multifunctionality will play a predominantrole for institutions of sustainability.


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DDrriivveerrss ooffIInnssttiittuuttiioonnaall CChhaannggee

Figure 3: Advanced Framework for Institutions of Sustainability - IoS

Institutional and Political Environment

Subarenasorganised according to differentFields & Scales of Interaction

Scales International

(EU / World) National Regional Local, etc.

Action situations Actors constellations Actors orientations Forms of interaction Interests of actors Knowledge of actors Mental models of actors Identit of actors

Action Arenaswhich differ by fields,scales and situations

Families of transactionsarrangedaccording to similar-ity of institutional fit of proper-ties of transactions to types

rules and governance

Transactionswith different properties,simple or complex, visi-

ble or hidden

Families of actorsar-ranged according to similar-ity of institutional fit of char-acteristics to types of rules

and governance

Types of governanceTraditional concepts Market Hierarchies, Hybrid formsAdvanced concepts Polycentricity Co-production Multifunctionality Coo eration

Types of rulesMeta-constitutional rules

Constitutional rules Collective-choice rules, Operational rules Categories of property

rights and duties

Fields Land, soil Water, flood Air, climate Biodiversity GMO, etc.

Actorswithdifferent characteristics,trustworthy or opportunistic,

rational or emotional

Institutionsas formal and informalrules, property rights

and duties

Governance Structuresmaking the rules effective

1. Select those families oftransactions and actorswhere the integrative-segregative dimensionis likely to be relevant

2. Identify and discuss thecost of integration andsegregation; comparecosts of embedding withsustainability threshold

3. Make compliance withSustainability Area ofEmbedding Costs asubset of meta-constitutional rules


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Conclusions

This paper has started with the question What is special about those institutions which bringabout sustainability? In order contribute to an answer we have introduced into the Institutionsof Sustainability Framework which structures the analysis of sustainability according to fourmain categories namely, transactions, actors, institutions and governance structures. Fromthere we proposed that the goal of achieving sustainability has to do with balancing two sorts

of costs and actor may face while being constrained by institutions. One is the costs from theintegrative effects of institutions on his individual decision making. The other is the costs fromthe segregative effect of institutions. From there we proposed to classify rules according totheir integrative and segregative effects on individuals. We explain why we think that themarket or state dichotomy is inadequate for subordinating governance problems and types ofrules. As a contribution to theory we have then structured the problem with achieving sus-tainability as a choice model in which we assumed a threshold of sustainability to exist. Sus-tainability in this model is described as societies compromise between institutions whichintegrate individual actors with their decisions in a wider system holding them fully responsi-ble for their decision making and those institutions which partly free individual decision mak-ers from parts of their responsibilities. It can be shown that different incentive structures foractors result from segregative and integrative institutions, respectively. Based on this model,we propose a theoretical method for the search for institutions which support sustainable

development. It becomes clear that changes in societies perception as to whether more seg-regative or more integrative rules are appropriate have to do with the complexity of the gov-ernance problem and the availability of knowledge. The more the governance problem ischaracterized by "decomposability" (Simons 1971), the more accurate are segregative rules.The more a particular governance problem is characterized by complexity (Kaufmann 1995),the more accurate are integrative rules. Many of the sustainability problems of today take theform of complex problems. Prominent contemporary scientific discourses like for example thediscussion about multifunctionality, multi-level governance in Europe, polycentricity, biodiver-sity, or cross compliance refer to very complex governance problems characterised by thefelt lack of knowledge about cross level relationships and effects. In line with our arguments itcan easily be shown that increased knowledge about our environment has already induced ashift towards more integrative rules for which sustainability serves as a "regulative idea".The proposed dichotomy between segregative and integrative institutions is already at work.

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