Summary of JOIE article (10 February 2025) by Geoffrey M. Hodgson International Management, Loughborough University London, London, UK. The full article is available on the JOIE website.
Institutional research distinguishes between ‘formal’ and ‘informal’ institutions. Largely through the work of Douglass North, this terminology took off in the 1990s. North often associated ‘formal institutions’ with rules enforced through a legal system. This lead should be followed and refined. In which case ‘law’ requires definition. An alternative claim, that ‘formal’ basically means ‘written down’, is arguably less useful. This paper follows North and others in seeing law as depending state.
Stressing the importance of clear definitions in this area, this paper shows that slight modifications yield strikingly different results. Contrary to some accounts, informal institutions can sometimes change rapidly, particularly in response to legislation. Informal rules normally play a vital supporting role in the enforcement of legal rules.
The paper reports bibliometric data on the use of the terms ‘formal’ and ‘informal’ institution. The distinction was used quite rarely until the 1990s, and North played a major part in its emergence. But the definitions of ‘formal’ and ‘informal’ institution were often muddled and unclear. North (1992, p. 4) wrote that institutions are ‘composed of formal rules (statute law, common law, regulations)’ alongside ‘informal constraints conventions, norms of behavior’.
Political scientists Gretchen Helmke and Steven Levitsky (2004) posed another definition. But they focused on ‘official’ versus ‘unofficial’. They also added unnecessary criteria, such as ‘written down’. This paper argues that taxonomic definitions should be as parsimonious as possible (Hodgson 2019). It proposes the following definition:
‘Institutions may be subcategorized as formal or informal. Formal institutions are constituted or maintained through legally decreed procedures, and laws make up the dominant elements in their rule systems. Informal institutions include language, customs, rituals, or table manners. Most of their rules are not constituted by lawmaking institutions.’
The empirical importance of appropriate definitions
Claudia Williamson and Carrie Kerekes have done important work on formal and informal institutions. Williamson (2009) adopted a measure of formality for a range of countries and compares this with their GDP per capita for the year 2000. They ‘define formal institutions as political constraints on government behavior and informal institutions as private constraints, such as norms or customs.’ This concentrates on one aspect of formal institutions. They compare their country measure with GDP per capita.
The results are challenging. Six countries had high levels of GDP per capita and low estimated levels of the strength of formal institutions. These countries are the Netherlands plus the Nordic countries. Other countries had low levels of development but varied enormously in the reported strength of their formal institutions. In increasing formal strength, they were Nigeria, Egypt, Jordan, Indonesia, Bangladesh, Pakistan, Philippines, Uganda and Zimbabwe. There is negligible correlation between the measure of formal institutional strength and GDP per capita. The explanatory burden shifts onto the strength of informal institutions. As Williamson concluded: ‘informal institutions rule’.
But is it reasonable to claim that formal institutions in the Nordic countries and the Netherlands to be very weak, and roughly equivalent in strength to those in (say) Nigeria? The idea that Pakistan, Philippines, Uganda and Zimbabwe have among the highest levels of formal institutional strength should also be queried. The choices of definitions and datasets matter.
The present paper used the same GDP data but a different measure of institutional formality. The GlobalEconomy.com index for the rule of law goes back to 2000 and, in its publisher’s words, ‘captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.’ Twelve countries had a GDP per capita level of at least $25,000 and a rule of law score exceeding 1.5. They included the Nordic nations and the Netherlands, plus other including the UK and US. Contrary to Williamson, this analysis suggests that formal institutions could have had a major positive effect on GDP per capita. Different definitions and measures can lead to dramatically different results.
The interaction of formal and informal institutions
Several authors have claimed that informal institutions generally change more slowly than formal institutions (North 1990, 1994; Williamson 2000; Roland 2004). There are many examples of long-surviving informal rules and cultural traits.
But there are also examples of rapid informal institutional changes. Helmke and Levitsky (2004) gave the example of the rapid disappearance in China of the practice of binding the feet of women. It lasted a thousand years, but within a generation it disappeared, principally due to strong social campaigns against it.
Homosexual acts have long been regarded as sinful by major religions, including Christianity, Islam, and Judaism. The survey of British Social Attitudes, in 1990, reported that 69 per cent of adults thought that homosexual acts were ‘always’ or ‘mostly’ wrong, compared with 19 per cent saying they were ‘rarely wrong’ or ‘not wrong at all’. But by 2010 these figures shifted dramatically to 30 per cent saying that they were ‘always’ or ‘mostly’ wrong, compared with 53 per cent saying they were ‘rarely wrong’ or ‘not wrong at all’.
This rapid change in beliefs may be partly explicable in terms of a series of legislative acts in the UK, including reductions in the age of consent for male partners, the ban on gay people serving in the armed forces being repealed, the instigation of gay civil partnerships, and the banning of discrimination based on sexual orientation. The legislation may have played an important role in legitimating more tolerant attitudes. There was also an energetic movement for gay rights.
Law is not simply an expression of authority but is also a constitutive part of the institutionalized power structure. Law is also a great motivational force. It works not simply through threat of punishment but also because of commitments to what is perceived as legitimate authority. Research using the distinction between formal and informal institutions should take such factors into account.
NOTE: Hodgson’s most recent book outlines the development of his thinking about institutions over the last 50 years: Geoffrey M. Hodgson, From Marx to Markets: An Intellectual Odyssey (Cheltenham UK and Northampton MA: Edward Elgar). Published March 2025.