Yu Chen Shen 900923-C557
Q1:
Economic progress and the instituted practice of institutionalization Abstract: First, the importance and three different kinds of institutions-The rule of the game
(Law), Social Technologies, Instituted Practices will be briefly introduced. Second part would be summarization of institutions’ evolution from different scholars. The impacts of institutions to economic progress would be mentioned separately here also. Then the third part would be how these three institutions’ combination influences the economic improvement, and more scholars’ economic progress concepts would be discussed together. In this part, three institutional issues would be used as framework to discuss the economic progress brings by institutions. In from family units to business units section, basically it would be how institutions organize a hierarchical social structure for efficiently managing to facilitate division of labor, divide the payoffs, and so on. Following the first section, peace, love, and understanding section argues that laws and language development build up trustable economic environment for strangers to cooperate. Last section is building computers out of people, which integrates two sections earlier and emphasizes institutions creating a web of social structures, norms, protocols, legal structures together making the whole human society as a computer that could self-organized deal with complex problems and pursue the same goal which individual cannot accomplish. In sum, take Taiwan as an example to illustrate all the ideas.

1.Introduction of Institutions: Started by Beinhocker (2006, p.261), he mentioned that a country’s wealth is not determined just by natural resources and physical technology, although these factors have sort of degree of impact, the most significant factor is Social Technology, which could mean the rule of law, the existence of property rights, a well-organized banking system, economic transparency, and other social and institutional factors. That is these examples above all combine together leads to a country’s economic success far greater than any other else (Beinhocker, 2006, p.261). The Social Technologies here is also known as Institutions used by economists.

Here, I would like to take Taiwan for example, a country with not so many natural resources such as metal, gold, and oil etc., which is very valuable in contemporary society, still has strong economy and human development index as we all known.
How they did it? The secret behind would be their sophisticated institution that made

1

Yu Chen Shen 900923-C557 the stable economic progress of the country and facilitates speeding up their economy recently.

From Holmèn’s 2013 lecture and personal experiences in Taiwan, the laws and regulations launched in Taiwan not only benefits and subsidize their industries long ago from early 1900s till now, but also their education system. Their highest education academic institution-Academia Sinica, which conducts worldwide famous scholarly research in variant kinds of subjects; and most important government-based R&D organization-Industrial Technology Research Institute, which applied technical research into practical use. The national universities or some senior high schools in
Taiwan are also related and being subsidized in the same economic improvement system in order to cultivate talented people. I will discuss and connect these influences of institution to Taiwan’s economic progress at last. On the other hand,
Beinhocker (2006, p.261) argued that there is no country with poor social technologies would perform well, no matter how much resources it got or how disciplined its macroeconomic policies are.

Take rapid rise in the production of U.S. in late 1990s as another example, in the beginning researchers thought physical technology might be the explanation, but they then figure it out the real driving force was how companies and industries in U.S. organizing and managing themselves, which is Innovation in Social Technology
(Beinhocker, 2006, p.261-262). The further research indicated the innovation race of how companies organizing and managing efficiently through imitating and competing each other accounted for the whole U.S. productivity during that time (Beinhocker,
2006, p.262). From the instances above, no matter how Taiwan and U.S. progress their economy, there are sophisticated national laws, establishment of related organizations, and efficiently organizing or managing methods in industries that help pursuit their goals.

After the conspicuous successes brought by well set-up of institutions, we are now looking into the characteristics of institution. What exactly institution is, how many kinds of types they are, and what kind of magic they got to improve the economy process are all we concerned. According to Nobel Prize winner Douglass North, institution is defined as “The rule of the game in a society.” However, Beinhocker
(2006, p.262, 263) defined its Social Technologies broader including structures, roles,

2

Yu Chen Shen 900923-C557 processes, and cultural norms e.g. organizational structure, roles, decision processes, formal rules and so on, which are methods and designs for organizing people in pursuit of a goal or goals. In Holmèn’s lecture (2013), there is another type called
Instituted Practices being introduced that are routines shared and used by many. In
Holmèn’s lecture, the three different kinds of institutions are introduced together and compared to see how they influence whole our human life.

2.Evolution of institutions: Rules of the Game:
According to North (1994), institutions are constraints that human build up to structure interactions. There are formal constraints (rules, laws, constituions), informal constraints (norms of behavior, conventions, and self imposed codes of conduct), and their enforcement characteristics. Basically, they are the rules of the game that organizations and their entrepreneurs are the actors e.g. city council, schools, firms, and churches. He then mentioned it is the mixture of these three components shapes the economic performance, but still got no guarantee that institution evolution will produce economic growth.

Later on I would like to introduce the other two types of institutions and their evolution which proposed by later scholars, and the concepts are broader than the basis of rules of the game.

Social Technologies
Regarding Beinhocker’s view of how social technologies evolve (2003, p.250, 264,
265), he mentioned the social technologies evolve through a method called deductive-tinkering while logical thinking and serendipitous trial-and-error are being used which is similar with technology evolution. In the meanwhile, the physical technologies coevolve with social technologies because many management innovations depend on advances in computing and communications technologies, vice versa. After searching the fittest social technologies, the successful ones would persist and then being copied and spread when less successful ones fade away.

Then Beinhocker (2003, p.266, 267) continued to explain the advantages of social technologies that make people urge to search better ways of organizing themselves constantly. The advantages is non-zero-sum games, which people can be better off

3

Yu Chen Shen 900923-C557 by cooperating in the world with finite resources, and the societies that are able to organize themselves well will be dominant. Social technologies provide non-zero-sum payoffs by following four sources. First, it is division of labor that people focus on their jobs and get better off by trading; second is the heterogeneity of people that people can satisfy their needs and wants by exchange; third is increasing returns to scale means people have higher chance getting more profit by expanding the cooperation; fourth is smooth out uncertainties over time that cooperation mitigates the risks by mutual sharing and helping. Despite social technology provides non-zero-sum payoffs by cooperative organizing and managing, it also needs to provide methods for dividing the payoffs and have mechanisms for managing the problem of defection e.g. free rider issue to let people have incentive to play the game, and to do these social norms and rules are necessary (Beinhocker, 2003, p.266-270).

From deductive-tinkering of fit social technologies, human also keep evolving increasingly complex and sophisticated social structures for addressing following three issues (Beinhocker, 2003, p.270-277). First, from family units to business units, with the concepts of non-zero-sum games in mind, people set up social structure with hierarchy, which facilitates the division of labor and processing of information. Second is peace, love, and understanding that emphasizes the importance of the rule of the law and development of language which provides protocols for cooperation between strangers also hierarchy management. Third is building computers out of people showing the remarkable achievements of social technologies that creates a web of social structures, norms, protocols, legal structures and incentives enabling people organized together to pursuit a common goal, which individuals are impossible to solve on their own.

Instituted Practices-Routines shared by many Then speak of instituted practices-routines shared by many; Nelson & Winter (2002) have proposed evolutionary view of how routines affect the working of economies and how individual gain high competence through practice learning and perfect their skills and routines. Competences are defined in Economics of Innovation: Glossary
(Holmèn & Min, 2011) as combination of skill, knowledge, abilities, and personal attributes that is necessary to perform certain functions. They also mentioned that besides the role of learning and practice, the degree of correspondence between past experiences and current situation maters as well. It could then expand the concept to

4

Yu Chen Shen 900923-C557

organizational routines that provide rich and relevant information to help organizations find ways to solve complex issues like increasing product variety routinely, which help economic evolution. In short, they explained routines pass through many generations to make our economic develop to modern state by enabling people doing something they cannot accomplish with limited strength. Nelson & Winter (2002) then made a short conclusion of the economic development that is combination of individual skills, organizational routines,

advanced

technologies

and

modern

institution

by

trial-and-error cumulative learning that derived partly from individuals, partly from organizations, and partly by society as a whole. In addition, the key driving force behind economic growth is changing from earlier technological advance to latter developing evolutionary analysis of economic institutions (Nelson & Winter, 2002).

3.Discussion of how institutions affect economic progresses: Just closely looked, I summarized how these different kinds of institutions infect our lives and make economy progress referring to the arguments made by various scholars before. I would further discuss the combination of these three institutions and how they interact with other economic concepts beneath from micro (individual), mezo
(organization or firm) and to economic macro level (economy as a whole) by using three institutional issues mentioned before as framework.

Beinhocker (2003, p.4, 5) threw questions in the beginning of the book that how can managers grow their companies and provide more jobs and opportunities for people, how can government grow their economies, and how can societies create the resources needed for better education, health care, etc. Actually, in very beginning of
Beinhocker (2003, front flap page), it already gave the answer said that it is the evolutionary formula, acting on technologies, social institutions, and businesses, that has taken us from the Stone Age to the enormously complex global economy of today.
As summarized before, physical technologies coevolve with social technologies from small to big step.

People first figured out they would all get better off by cooperation, which provided by well-set social technologies. It all started from the benefits get from division of labor, and how people organize themselves efficiently to gain the same goal. According to
Swan (2009, p.173-183), he combined many scholars’ views of what division of labor brings or comes from, it seems like the specialization may create innovations of new

5

Yu Chen Shen 900923-C557

technologies to make economic grow, or either vice versa. He said there is no right or wrong of the causation, they may all be correct. Now, referring to Jacobs (1969
p.49-84), however she argued that division of labor itself doesn’t do much to economic development, it also needs new activities stem from problems or ideas suggested by existing technologies and it always depends on older works (Holmèn,
2013 lecture). I regard it is correlated to instituted practices such as routine specialization created by division of labor, where organizational routines provide experience-based solutions to complex new problems e.g. increasing product variety.
In Holmèn lecture (2013), North (1994), and Nelson & Winter (2002) all also speak of same concept that world is path dependent, which new activities or processes are dependent on the past. Later on, with first issue known as from family units to business units based on division of labor, people create hierarchical social structure for better organizing and managing for facilitating division of labor, dividing payoffs, and so on.

Combine ideas with Holmèn’s lecture (2013), there are all kinds of institutions setup like laws which protect our property rights and regulated contracts, or buildup of proper social structures and organizations like financial or banking system. It also provides reliable costly signals to help investment of restless capitalism. I then correlate the first issue to above ideas and the second issue-peace, love, and understanding. It is laws and development of language (not only speaking language, but also professional typing language e.g. accounting) enabling people to cumulate their knowledge and learning from routines or experiences in a safe and reliable environment that you don’t need to think too much to trust and cooperate with people in an industry or specific firm. Strangers could easily teamwork within the structure.

Last but not least, let us connected with issues and concepts all above with the last issue-building computers out of people, from tending to cooperate for gaining mutual gain to build up a trustable and disciplined business environment, people develop language and come up with efficient organizing methods to run economic activities.
They keep deductive-tinkering the fittest ways of managing to success, and spread the successful ones. In the meanwhile, it is these kinds of innovations in institutions and technologies’ coevolution by imitating and competing within firms and industries being the driving force of restless capitalism, which then make economy grow. We are now like a computer that is capable of handling huge complicated tasks we could

6

Yu Chen Shen 900923-C557 never accomplish alone.

Just like Beinhocker (2003, p.6) said that still the global economy exists too many decision-makings, it sorts these things out in a bottom-up, self-organized way. I credit the effort to the most important factor, which is setup of all these different kinds of institutions and the hidden concepts beneath it. As all the examples and concepts we saw, institutions slowly affect society from micro and mezo level, which infect individuals, families to organizations, then to macro level of economic growth and progresses. 4.Conclusion and case of Taiwan for illustrating the whole: At last, take Taiwan as an example to sum up the ideas. In mid-1900, almost whole industries in Taiwan were based on import substitution by their government’s policy, and that was the time Taiwan cumulated their skills of division of labor and learned from the routines. Later on, with sophisticated skills and experiences, Taiwan changed its policies to export their own products to the world. At late 1900, the setup of the high-tech institutions and organizations in Taiwan and correlated educational system help industries grow also cultivating talented people in the same time. It is mixture of all these institutions, Laws, Social Technologies, Instituted Practices, creates Taiwan a stably long-term economic structure and gain their power of knowledge step by step. Like cumulative causation and concept of path dependence,
Taiwan improved their learning of know-how from past experiences, and then did things better gradually from small import substitution to high-tech country now. The hands support behind would be their complete institutions, which silently organize the whole economic system and make it progress.

7

Yu Chen Shen 900923-C557
Q2:
Breaking Bad Abstract: The argument of coevolution of firms and industry starts from the signal sent by a firm or several firms, which then changes the environment of whole industry. The environmental changes further transmit signals back to the firms causing new ideas or innovations to compete with each other for circular causation of value creating and value capturing. The course project of restaurant industry has been used here to illustrate the idea. Different kinds of signals have been shown, which could either lead the firms to pursue the same goal e.g. providing faster services, or diversification e.g. creating different kinds of experiences for customers.

1.Signaling in restaurant industry from course project group 9: According to course project group 9, restaurants compete with each other in several ways. In quick service restaurants, customer value depends mostly on the service speed. In order to create value, quick service restaurants send signals to customers that they are the fastest no matter on TV, Newspaper, social media or any other advertisement channels. Pizza Hot even got a punishment system for customers that if they deliver the pizza over 30 minutes to customers, they would just treat you for free. In the case, I consider this is a kind of costly signals, which is conspicuous precision signal that means any significant expenditure of time or care relying on the design and complexity of a product fit in this category (Fallahi, lecture 2013). It specific sends a message to the customers that the precise delivery time is one of their product’s advantages. There is also other kind of conspicuous precision signal such as healthy quick served food that is whole the concept that Subway dedicates to send. It is the significant expenditure of care to the health. These kind of fast or healthy signals not only exist in certain companies, they are being imitated and spread out by others as well. McDonalds is also trying hard to turn their image of junk food to fit currant healthy trend by providing more salads, fruits, etc. and sponsor or hold sports events, because the concept of eating healthy has been regarded more important to the public. In the same time, fast-services-competition keep running, for instance, the 24/7 delivery service and drive through service. We now can primarily see how the signal sent by one company affects whole the industry and the customers, then competitive requirements changes in the industry further conveying signal back to firms.

8

Yu Chen Shen 900923-C557
There is another type of costly signal called conspicuous reputation where signaling to a great extent is relying on the elements of marketing and branding (Fallahi, lecture
2013). This type of signal is most commonly discovered in restaurant industry, in which advertisement competition is all around our life. It seems who got most of the money could earn more attention and shape a more solid image in people’s heads.
McDonalds is always a good example here; its reputation has already been worldwide famous now. In Iran, a country that McDonalds is not allowed due to bad relationship with USA, people there not even know it, but also have really similar quick service restaurants running. In the context, we can see how strong the power behind the signal has been made, and how it spread globally. The fast food eating culture just follows the signal transmits to the other world. In full service industry, the reputation may even be regarded more important to firms, because the food quality and services are most regarding customer value. Taiwan for example, is now having more than service competition. Restaurants are now one after another creating sensational and emotional experiences for customers by having a theme in the environment. The situation here is more complicated, because it is not about pursuing the same goal like healthy and fast. It requires the firms to be diversified by offering different types of experiences and also delicate services. Therefore the entire industrial environment is now more dynamic, which then loop back to the individual firm triggering them to come up with new ideas, non-technological or technological innovation to satisfy their customers. 2.Conclusion: It all started from signals sent by one or several firms, then affects the entire industry, and then loop back sending signals to the firms that show how is the environment now.
The firms then may create new ideas or innovation to improve and compete with each other to earn more profit. The coevolution of firms and industry just looks like a circular causation of value creation and value capture, where the value creation here in restaurant industry could either be fast service or good quality, etc.

9