Peter Levin’s Rethinking Markets

January 13, 2008

Two forms of institutions

Filed under: Institutional, Markets — Peter @ 8:37 am

I’ve been thinking a lot about institutions lately, in light of my earlier post on check-lists and medical practices. I originally had in mind a post about how the Berger and Luckmann version of institutionalization at the more marco-level is about the crystallization of practices. So what check-lists are theoretically are the same as other kinds of models and technologies: they are congealed expertise. For good and for bad, technologies, models, and checklists act as an alternative to pure expertise and craft knowledge. To the extent that they become taken-for-granted, they become the cognitive institutions envisioned by B&L. This does not imply a break from creativity, or ’structure’ as the opposite of ‘action’ (insert Giddens here if you like). They enable creative action as well. They also preclude new action or mask the world sometimes, if the world changes but the knowledge remains stuck in a model or technology. But the point is that we can look at institutions broadly as congealed knowledge.

But then I ran across the recent news that Second Life is banning banks. The issue is that virtual banks offer interest, which can then be returned to depositors, but they do not offer protections of real-world banks. Because Linden Dollars can be exchanged for real dollars, SL banks can actually be sources of profit and loss in the real world. And now they’re being banned:

as of January 22, Linden Lab will be removing all objects that are related to in-world banking. Until then, the company hopes that the banks will settle their debts with residents as best they can, but if they are caught trying to operate after January 22, they will be punished by possible suspension, termination of accounts, and (*gasp*) loss of land. Legitimate banks that provide a government registration statement or financial institution charter will be allowed to continue doing business, as will entities conducting marketing or education.

No FDIC in real-life means no banking in Second Life. This is institutions in the more Douglas North, economic sense. Here, banking ‘institutions’ act as rules of the game, and the Linden Labs folks act as rules and structures of SL. And we might be witness to a singular event: a set of runs on virtual banks as customers line up to take their Linden Dollars out before 1/22.

What’s interesting is the power of real-world institutions to actually impinge on a made up reality. After all, SL could have been created with any number of rules and ties to real life. Or no ties at all, as there’s no ‘rule’ in SL that people who cannot fly in RL are also not allowed to fly in SL.

There’s good stuff in between these two visions of institutions. For instance, think about which sets of conventions and rules are reproduced in an SL environment and which are not. Physical laws are often ditched, but those pertaining to land and real estate are kept. Gambling was eliminated because it might have been subject to RL laws and regulations, but laws regarding appraisals and insurance of real estate are left out despite the centrality of those kinds of transactions.

In any event, I’m not sure that institutions are anything, but I do think there are some specific phenomena amenable to one or another institutional distinction.

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