Institutions

I want to share some thoughts about institutions. What makes them special as organisations? What is their history? Will there be more institutions in the future? Should there be?

As a first definition, I'm tempted to say that institutions are organisations that are neither family-based, nor for profit. This makes a difference for what holds it together. 

In a family, members stick together out of loyalty to other individuals, because of personal relationships. There may be some fixed roles, but in principle a person in a family is irreplaceable. This was less true in the past, when families had to do more of the tasks that institutions and companies do today. Back then, a person's role in a family came with much more specific expectations. This may have been partly cultural, but it also makes sense for an organisation that has to fulfill a lot of complicated functions where people sometimes need to be replaced. 

In a company, members are attached to the organisation through equity, or through a contract (or both). To members without equity (most employees), there is not much difference if they work for a for-profit company or an institution. If the company doesn't fulfill its part of the contract, the individual should leave. If the individual doesn't fulfill their part of the contract, the company should kick them out. At least in theory. Having equity, on the other hand, means being entitled to a share of the profits. This is an entirely different relationship, which has proven historically to be a very powerful way to align people's interests. However, for there to be a company, there must be the potential for profit.

This leaves us with institutions. An institution is an impersonal organisation that exists to produce some value that can't be sold for profit. When does it make sense to produce something that can't be sold for profit? Take roads, for instance. The economic value of roads clearly is larger than the cost of building them. However, it is often impractical to collect money from people based on how much they use a specific road, and adding the infrastructure necessary to do so adds cost and decreases the economic value of the roads themselves. So, the modern solution is to tax some combination of vehicle owners and everyone in general to finance the roads, and to make them freely available. 

Let's challenge this definition. What about education and healthcare? Clearly, it's possible to sell these things for profit, and yet this is mostly handled by non-profit institutions. I'll just leave this aside for now, saying that it's an ongoing process to determine which model really works best here. In the case of general education, it is hard to measure the value the education will provide (since it takes to long to pay off), which makes it difficult for the client to know how much to pay. In the case of healthcare, the client is often at a natural disadvantage since they may have a strong time preference. 

What about publicly owned companies? Why not be completely an institution? Probably, the reason is that it makes it easier for a government to raise money quickly by selling a part of the company.