Social Institutions of Capitalism Essay

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The concept of capitalism refers to the idea that certain societies allow economic actors to rationally organize the social and financial capital at their disposal in pursuit of perpetually renewed private profits. The organizational forms actors have chosen to organize economic transactions vary, but an oft-used classification distinguishes between formal organizations, markets for the exchange of capital, goods, and services, and organization-market ”hybrids” like interorganizational networks and alliances. As these organizational forms represent the core engines of production and exchange in capitalist societies, they are typically referred to as the economic institutions of capitalism.

But although economic institutions are necessary ingredients of capitalist societies, they are not sufficient conditions to support the maintenance of a capitalist system of production. The success of economic institutions is contingent on the presence of a set of public or private arrangements for the regulation and enforcement of exchange transactions between two or more autonomous capitalist actors: the social institutions of capitalism. The conditions these social institutions ought to promote are fourfold. First, social peace, the condition in which potential conflict is diminished and in which cooperation is supported. Second, individual freedom, encompassing guarantees to at least some actors that they will have the leeway to engage in exchange agreements and co-dictate the terms of those. Third, transferable property rights, which are attached to physical commodities or services, such that they may be exchanged in the marketplace without much friction in the form of transaction costs. Fourth, enforceable contracts, instruments facilitating the making and keeping of mutual promises about future exchanges.

Whether the social institutions of capitalism referenced above should be classified as public or private depends on their position vis-a-vis the relationships they govern, as well as on the nature of the sanctions they rely on to regulate capitalist exchange. Private institutions arise within long-lasting exchange relationships between two or more capitalist actors, and serve to make those relationships self-enforcing and self-policing. Nevertheless, not all background conditions necessary for capitalist production can always be provided by such intrinsically more efficient private institutions. Social peace and individual freedom have a strong public goods character. Everyone benefits when these conditions are in place, but no single actor can produce them by individual means or even has the incentive to contribute to their advancement. Under such conditions, the rational pursuit of private objectives by self-interested individuals may produce collectively disastrous outcomes. The classical way out of the dilemma of the provision of public goods is the (partial) abdication of individual authority to public institutions. Individuals may jointly agree on certain collective limitations to their natural rights and freedoms, in return for long-run stability (social peace) and greater security that they actually get to enjoy the rights they do retain (e.g., certain forms of individual freedom). In all modern capitalist societies, these collective limitations have taken the form of the state.

The state is a versatile creature in that it can not only provide for social peace and individual freedom, but also for transferable property rights and enforceable contracts. But states are public institutions, and as such often criticized for being slow, inefficient, and breeding the bureaucratic personality. Fortunately, whereas state bureaucracy and public sector governmentality probably represent the only feasible solutions to the problem of providing social peace and individual freedom, private institutional alternatives are available for the provision of transferable property rights and enforceable contracts. These institutions include: kinship ties, clans, trust, and reputation. By stipulating and policing pro-social norms, such private institutions circumvent any resort to public institutions and may even fill the voids in case the latter are absent or deficient in a given setting.


  • Heugens, P. P. M. A. R., van Oosterhout, J., & Vromen, J. J. (2004) The Social Institutions of Capitalism: Evolution and Design of Social Contracts. Edward Elgar, Cheltenham.

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