IIM/IP 8 7 - 7
Self-Organization Instead of
Regulation: Using a New Theory of Economic Associations
Michael Hutter
University of Witten-Herdecke
March 1987
ISSN Nr. 0722-6748
Forschungsschwerpunkt Strukturpolitik (IIMV) Research Unit
Industrial Policy (IIM)
Wissenschaftszentrum Berlin für Sozialforschung
Self-Organization Instead of Regulation: Using a N e w Theory of Economic Associations
Industry associations and professional associations play an im
portant role in contemporary economic life, particularily in an economy's relationship with political systems. Yet, economic
theories have rarely directed their attention to this phenomenon.
The neglect has far-reaching consequences for the repertoire of regulatory techniques available to policy makers. It is argued that the recognition of associations as forms of industry or trade self- organization leads to better results in achieving policy objectives than the usual techniques of regulation.
Part I recalls traditional versions of association theory, then outlines the argument of two more recent contributions which serve as a starting point for the present exploration. Part II illustrates the theoretical issues through a description of the internal and environmental structure of a "case study committee".
Part III draws on the results of contemporary social and natural science. It is shown that economic associations are not simply tools for the interests of individuals of firms, but that they are the forms which the self-organization and self-reproduction of an industry takes. A theory of evolutionary self-organization provides the logical context for interpreting the Association as a form of economic organization which has co-evolved with the Market and the Firm. Part IV applies the theory to some empirical observations in the literature as well as to the structural
features of the case study committee.Part V deducts policy
recommendations for those who are in a position to influence the development of economic associations. Strategic considerations for the policy makers wanting to use associations as players in the regulatory game are developed.
Work on this paper has been funded and supported by the Interna
tional Institute of Management at the Science Center Berlin. Par
ticular thanks go to J.-Matthias von der Schulenburg for his assistance and critical comments.
Selbstregulierung versus staatliche Regulierung: Entwicklung einer neuen Theorie zur Funktion von Wirtschaftsverbänden
Industrie- und Berufsverbände spielen eine wichtige Rolle im Wirtschaftsleben, insbesondere im Verhältnis zwischen Wirtschaft und politischem System. Trotzdem hat sich die Wirtschaftstheorie bisher wenig mit diesem Phänomen beschäftigt. Diese Vernachlässi
gung hat weitreichende Konsequenzen für das Repertoire an Regu
lierungsmaßnahmen, das Wirtschaftspolitikern zur Verfügung steht.
Es wird behauptet, daß das Verständnis von Verbänden als Formen der industriellen und berufsständischen Selbstorganisation besse
re wirtschaftspolitische Ergebnisse liefert als die gängigen Techniken der Regulierung.
Teil I erinnert an traditionelle ökonomische Theorien der Ver
bandsbildung und skizziert dann einige jüngere Beiträge, die als Ausgangspunkt für die vorliegende Arbeit dienen. Teil II illu
striert die theoretischen Probleme anhand der Beschreibung des internen Struktur und der Umweltstruktur eines "Fallstudienkomi
tees". Teil III verwendet eine Reihe von Resultaten der Gesell
schafts- und der Naturwissenschaften. Es wird gezeigt, daß Wirt
schaftsverbände nicht einfach Werkzeuge der Interessen von Indi
viduen oder Firmen sind, sondern daß sie die Formen sind, die die Selbstorganisation und Selbstreproduktion einer Industrie an
nimmt. Eine Theorie evolutionärer Selbstorganisation liefert den logischen Rahmen, in dem Verbände als Formen wirtschaftlicher Selbstorganisation interpretiert werden, die sich neben Märkten und Unternehmen entwickelt haben. Teil IV wendet die Theorie auf einige empirische Beobachtungen aus der Literatur an, sowie auf die Strukturcharakteristika des Fallstudienkomitees. Teil V lei
tet Handlungsabweisungen ab für diejenigen, die in der Lage sind, die Entwicklung von Wirtschaftsverbänden zu beeinflussen. Stra
tegien der "therapeutischen Interaktion" und der Kooperation di
vergierender Interessen im Regulierungsspiel werden entwickelt.
Schließlich wird auch die Selbstorganisation der politischen Ent
scheidungsträger als Verhaltensstrategie diskutiert.
Theories explaining the emergence and the behavior of economic associations are rare. The most successful contribution has been the set of hypotheses suggested by Mancur Olson in 1965 and re
formulated in 1982.
Olson's analysis applies to a special case of economic activi
ties. He claims that, under conditions of low uncertainty, the selfinterest of economic actors will prevent them from forming large groups in order to secure benefits (public or collective goods1 ) from a political system. The formation of such associa
tions, as we would call them, takes only place in cases of sharply defined interests and exclusive rewards, and in cases where rewards can be linked to the excludable benefits of inter
nally produced goods.
Olson's argument has had wide-spread appeal to both economic and political scientists. Unfortunately, most commentators jumped to a premature conclusion: Olson's findings are interpreted as an argument for the impossibility of large interests groups under traditional assumptions. Instead, theoretical progress lies in the opposite direction. Olson's analysis indicates that the un
disputable observation of interest groups of all sizes can not be explained with traditional assumptions, notably within the as- sumption of perfect, or slightly imperfect, information.2
Another theory suggested at the same time by James Buchanan has found less attention. Buchanan's analysis is limited to cases where public goods are provided or produced within a specific sort of productive arrangement of economic actors. Such arrange
ments are called clubs. The "theory of clubs", along the lines suggested by Buchanan, has been extended and differentiated. The applicability of pubic good provision to the securing of polit
ical goods has been suggested (Sandler/ Tschirhart, 1980; Pethig, 1985; see also Hutter 1986a), but analytical problems have been kept simple by sticking to internally produced goods.
A more promising explanation of the association phenomenon has emerged in the context of a generalized theory of economic organ
isation. Modern work on this theory begins, again-, with two al
most simultaneously published contributions. Stigler (1961) initiated a rigorous analysis of search and information costs, but Coase1s contribution (1960) had much wider impact: His
"theorem" has opened the way for a radically expanded framework of economic analysis (see Hutter,1988). Central to the analysis is the relationship between "property rights" and "transaction costs". Transaction costs were neglected or outright excluded by the early Coasean theory, but meanwhile they have been recognized as a powerful explanatory tool in the analysis of various forms of economic organization. A number of authors suggested that
transaction costs are the costs of all economic information, once information is interpreted not only as the transmission of sig
nals (as it is still assumed in Stigler’s model), but as the generation of new signals and codes as well (Hirshleifer, 1972;
Dahlman, 1979).
It is therefore not surprising that the first attempt at out
lining a theory of economic organization was stated by the two most prominent practitioners of Coasean analysis, A. Alchian and H. Demsetz. In "Production, Information Costs and Economic Organ
ization" (1972), they propose an explanation for the emergence of the firm as a form of economic organization alternative to the market: Firm-specific configurations of property rights are
interpreted as behavioral arrangements which permit a reduction of transaction costs, or, as they are termed explicitly, informa
tion costs.
Alchian and Demsetz argue that firms are characterized by team production which performs better than market exchanges in
metering input productivity and rewards if the technology of production demands a joint use of inputs and, subsequently, a lumpy reward which has to be distributed‘'between inputs. In team production, the production function is not separable in two or more functions each involving only one member's input. Conse
quently, "team production will be used if it yields an output
enough larger than the sum of separable production of (total output) Z to cover the costs of organizing and disciplining mem
bers" (p. 779). •
In comparing the two forms of economic organization, Alchian and Demsetz do not emphasize the joint use of material resources.
They emphasize the cost of information factors and the superior performance of the firm's contractual form. Not a new physical arrangement of inputs accounts for the superior performance. De
cisive is the improved technology of performance monitoring which minimizes the costs of registering, metering and transmitting
information. In a world of high uncertainty (and this is the tenor of the Knightian "Chicago tradition"), improvements in the
"revelation and exchange of knowledge" (p. 795) are sought and realized through a new form of organization.
Further development of the theory of economic organization must be credited primarily to the work of Oliver Williamson.
Williamson uses transaction costs to explain differences in eco
nomic organization in general. Over the years, he has investigat
ed vertical integration, non-standard commercial contracting, organization of labor, regulation issues and specific forms of internal organization or structure (for an overview, see
Williamson, 1984). Williamson unfolds the transaction cost con
cept by identifying three "underlying dimensions of transaction":
asset specificity, uncertainty and frequency. Most of his own work relies on the effects of asset specificity (1984: 221). But he also emphasizes the importance of uncertainty. Taking his cue from Hayek and his terminology from Koopmans, Williamson explains that uncertainty is not only of a state contingent kind "arising from random acts... and unpredictable changes", but it also
arises because "parties make strategic plans in relation to each other that are the source of ex ante uncertainty and ex post surprises" (1984: 204).
It is the intention of the present paper to extend the theory from this point of departure. The strategy will consist in
pushing the assumption of uncertainty even further. It will be claimed that the self-interest of economic actors leads to the emergence of associations especially in worlds of. high uncer
tainty. As Alchian and Demsetz used the notion of "teams"3 to define the mode of production which makes firms a successful alternative to markets under conditions of non-separable produc
tion functions for private goods, this paper introduces the notion of "committees" to define the mode of production which makes associations successful under conditions of non-separable production functions for non-private (mixed or public) goods. In other words: As firms are filled with teams doing their produc
tive performance, associations are filled with committees doing their productive performance.
Admittedly this is a rather large scale proposition. Associations are not explained as a marginal phenomenon in the periphery of an economy. They are conceived as a form of economic organization alternative to firms and markets. But the claim is not new. At least among political scientists, such claims have been made be
fore (Streeck/Schmitter, 1985).
Before the task of theory formulation is tackled in part III, a brief case study is presented and analyzed in part II. This interlude is intended to provide us with a better knowledge of some of the structural features of associations which are in need of explanation, and with a real world example lest we get lost in the abstractions of the theory.
II. Observing a Committee at Work
In order to identify the actions of one particular industry as
sociation committee and its relationships with the actions of other committees, with associations and other economic and polit
ical persons in its environment, one particular case study com
mittee is chosen: the committee for industrial property (gewerb
licher Rechtsschutz) within the association of pharmaceutical manufacturers in West-Germany (Bundesverband der Pharmazeutischen
Industrie). This committee has been observed by the author for a period of more than 4 years in the context of another research project (Hutter, 1988).
Figure 1 outlines some features of the case study committee's internal structure. Three features deserve particular attention.
1. All of the seven large domestic chemical corporations are represented on the committee. These firms hold about 30% of the German pharmaceutical market. Two firms (Madaus, Byk- Gulden) are of medium size, with a large share of pharmaceut
ical production. One of the firms (Beiersdorf) is also of medium size, but has most of its sales in other health pro
ducts .
2. The committee can draw on staff support from different asso
ciations. Depending on the task, a professional from the Phar
maceutical Industry Association (BPI), the Chemical Industry Association (VCI) or the National Industry Association (BDI) will be charged.
3. The individuals representing the member firms on the committee typically have multiple committee memberships. In 1985, two members (Hoechst, Bayer) stood out in this respect. The member from Bayer, in fact, held memberships in 33 different commit
tees (Hutter, 1988). A closer look at the dimensions of these linkages reveals the following characteristics: one linkage moves with industry aggregation: industrial property in the pharmaceutical industry is linked to industrial property in
Figure Is Organizational Structure of the BPI committee on Industrial Property in 1985
Chairman (Schering)
rJ = = J b d i
| Staff ->VCI BPI
member Hoechst
1 //member 2 / Bayer
member 3 BASF members4 \ ' X z ’meribeV 5 member 6 Boer erz ringer M \ Merck /memjjer 7V n W b e r menoar 9 / Manaus N3e i e r s d o r By ?-Gulden Multiple^
Member snip's;
standing advisory committee European Patent Office committee
on indus
trial property VCI
committee on indus
trial property BDI
international expert circle
"Interpat"
professional association for industrial
and intellec
tual property
Figure 2: Organizational Structure of the VCI and the BPI
8 regional \ subassociations
31 special trade associations BPI
President
executive committee:
8 members
board of directors: 26 members 24 Committees
Prop. /
'//////,
the chemical industry and to industrial property in the manu
facturing industry. A second linkage moves with the product region: national industrial property is linked- with the
European industrial property and with industrial property on a global scale, the expert circle "Interpat", for instance,
groups the heads of the patent departments of about 30 of the worlds largest pharmaceutical producers. A third linkage moves with "constraint region": patent law is linked with trademark law, copyright law and with the entire competition law.
This strong interdependence between committees in many associa
tions through a network of multiple memberships is a structural feature which demands particular attention.
Figure 2 outlines some features of the case study committee's external structure, i.e. its association environment.
The committee on industrial property is one of 24 committees of the Pharmaceutical Industry Association. The Pharmaceutical Industry Association is, in turn, one of 31 special trade asso
ciations which, although formally independent, are strongly linked with the Chemical Industry Association through finances, staff, firm memberships and the individuals who represent member firms. The Chemical Industry Association has - as was noted al
ready in Figure 1 - its own subcommittee on industrial property, within one of its 19 specialised committees.
To summarize: The organizational structure of an association is characterized through committees, not through individual members, even though committee members are clearly identified as firm re
presentatives. Distinct structural features are observed within the case study committee as well as in the association environ
ment within which the committee's actions take place. A peculiar feature awaiting explanation are the frequent and intensive re
lationships between associations through staff tasks and multiple committee memberships.
III. Explaining the Structure of the Association:
A Theory of Social Self-reproduction
"Explaining the structure" is, to Alchian and Demsetz, one of the two principal tasks of an economic theory of organization (1972:
777). Given that declaration, one is surprised to find almost no material on explaining the structure of the firm in the 1972 paper. A recent sequel (Alchian/Woodward, 1987) continues to ignore the issue. Williamson as well, gives us few clues to an explanation of an economic organization's structure.
This seeming neglect is easy to understand ,z"The theory which we are about to develop attempts to utilize the results of a number of branches of science which have no self-evident common ground with economic science. Yet, parts of the approach have been tried out in various branches of economics. Arranging these parts in a sequence may thus not be so difficult after all, and the effort necessary may well be exceeded by the gains in understanding the conditions of emergence and the mode of behavior of economic associations.
I propose to arrange the various parts of the theory in a se
quence of five steps. Once we have gone through these five steps of the argument we should be in a position to explain the pecul
iar structure of associations.
Step 1: The Evolutionary Approach
Evolutionary theories of structure are not new in the economic literature. In the contrary, a growing literature on several
varieties of the approach exists (see Witt, 1987, for a review of the literature).
Armen Alchian was one of the earliest contributors to contempo
rary evolutionary economic theory. Although this question is not treated explicitly in the 1972 article, Alchian and Demsetz would surely frame their answer in evolutionary terms: different struc
tural variations emerge and are tested by economic actors. Some
of them survive and become standard contractual forms. Others are judged to be of less value and are consequently not imitated and
elaborated. ■
This paradigm for explaining the development of social structures has had strong appeal for economists. The theory of biological evolution provides a well differentiated model of the process.
All that remains to be done is a transfer of the model from
living organisms to social institutions. But the transfer is not that simple.
There are two prominent schools of thought which use the evolu
tionary paradigm: the older one perceives social institutions as the actual subject of evolution (Witt, 1987: 110f.). The approach is handicapped by the rather obvious contradiction between the axiom of "free individuals" as the only elements capable of ac
tion on one side, and the■inference of a self-evolving institu
tion on the other side. Von Hayek is the most influential con
tributor to this approach. Alchian and Demsetz must be counted to the same school of thought: they, as well, assume that firm
structures emerge in a process of competitive elimination in changing environments. They assume, at the same time, that only
individuals can be units of action - and thus run into the same contradiction.
The contradiction seems to be resolved in the more recent socio
biological approach (Witt, 1987; 134f.). In this genuinely bio
logical model the structural features of social institutions are perceived as reproducible parts of a gene's code. Free individ
uals are perceived as the phenotypes of a gene. It is hypothe
sized that those genes are selected which include information about specific patterns of social behaviour. The socio-biological model retains an essential feature of biological evolution: it refers to living organisms. This advantage, however, is offset by considerable implausibility. Even if genes facilitate the emer
gence of specific institutions, the finely honed details ob
served, for instance, in the history of contracts must then still then still be explained as the result of rational construction,
i.e., the result of design instead of evolution. The question remains: What or who are the units which evolve? I suggest that it is indeed the form of organization itself which evolves. To evolve means to reproduce the genetic material, the information which allows the unit to maintain its identity. Associations, therefore, must be shown to reproduce themselves. In consequence, we should be able to observe something comparable to "genetic information" within the actions of associations. We will not compare this process of institutional evolution with the self
reproduction of human genes. The comparison will focus on very simple biological systems, since we are only concerned with one structural feature: the ability to self-reproduce.
Note, however, that our approach gives a particular meaning to the notion of self-organization. Keeping in mind our evolutionary perspective, our definition of self-organization includes the process of self-reproduction. No basic elements are given. We are not talking about the changing patterns in which chemical or
physical structures arrange themselves (Blaseio, 1986; Witt, 1985). Every element of the process is a result of evolutionary change and has to be produced by the system which eventually consists of these elements.
Such self-reproductive processes were, up to now, only observed in the field of life sciences. There, the process of genetic re
production characteristic of biological systems (or "organisms") has been analyzed in molecular detail, and some surprising in
sights have been gained. In order to transpose these results to the social world, steps 2 and 3 of the theory must be accom
plished first.
Step 2: A New Economic Theory of Information
The literature following Stigler’s initial work on search and information costs has remained within strict formal boundaries.
What is being called an "economic theory of information" is
basically an application of information-transmission theory. One assumes that a given supply of signals is transmitted from point
A to point B. The loss of information during this process can be calculated if some of its key parameters are known. In this theo
ry, information is assumed to be basically complete. Incomplete information is only defined in relation to the complete set of signals to be transmitted. Information can get lost or destroyed during transmission - just as parcels can get lost in the mail service - but we are always talking about something that was
there at a beginning which the theory sets for itself. If we want to push the assumption of uncertainty, as it was claimed in part I, such a theory is inadequate. We need a new economic theory of information, a theory which starts from the assumption that in
formation, in the social world, is as scarce as matter is in the physical world. Not the image of full knowledge, of insight into the 18th century’s Divine Plan is adequate. Adequate is the image of the rarity and improbability of life processes in the endless voids of the physical world. "Uncertainty" is the name of the.
endless void in the social world. Surviving in uncertainty, developing protective shields against it - these are the basic tasks of the participants in the social world. Consequently, any marginal advance of a participant in registering, processing,
retrieving and disseminating information can bring distinct evolutionary advantages.
Furthermore, information is not only scarce. It is something that has to be produced in a lengthy and costly process. As obvious as this observation may seem it has found little attention in the economic literature. However, if we look outside the boundaries of conventional theory, we find that a much broader communication
, <fe
theory has evolved in the fields of psychology and sociology.
This communication theory provides an approach which allows the consideration of new messages. It does so by insisting on the recognition of information's structural features. To make a
potentially long story short, I will restrict the exposition of the theory to a few basic points.4
Every bit of information is the result of a three-fold selection process. These selections may be characterized as follows:
(a) design of message
An economic actor formulates or designs the information which someone else is supposed to register. This design encompasses all dimensions of the message: words, timing, media, repetition,
context of other messages, etc. If the dialogue partner operates in a non-economic context, special difficulties ensue: the mes
sage must be coded in a way understandable to the recipient without losing its meaning in the economic context. The outcome of this activity is not yet a message: it is merely an intended message.
(b) registration of message
Another actor registers an intended message as information -
definable as "a difference that makes a difference to him in some later event" (Bateson, 1979:381). The definition is consistent with the Shannon-Weaver definition of information as a measure of uncertainty reduction. It is broader than definitions which as
sume given sets of signals. This act of registration is what we usually have in mind when speaking of "receiving information".
(c) interpretation of message
The intended messages, recognized by other actors must be inter
preted by the message designer. There is no such thing as an unambiguous transmittal of information. The sender never knows which differences have been registered by the receiver as in
formation. He is always forced to infer such a registration, based on the reactions of the receiver who is assumed to under
stand the message.
It follows that information, as it is traditionally understood, is only one phase in a more complex process. Only in what might be called metaphorically "a mutual envelope of understanding"
does information carry any meaning.5
To summarize: The basic elements of communication are not our usual self-evident bits of information, but a much more improb
able simultaneity of communication form, registered differences and inferred understanding, involving at least two participants.
Such events, such relationships between participants will be called messages.
Upon the foundation of such an extended theory of communication, we are now able to perceive much more clearly what the social world consists of: As the life world consists of matter, the
social world consists of Messages. All social interactions, including the transactions of an economy, contain nothing but streams of messages, regulating the future behaviour of those actors participating in a society, including its economy. In
consequence, uncertainty in the social world is not of a physical nature. It is caused by the constant self-interested actions of economic and other social participants who tirelessly create false information and new information.
This clear distinction between the (material) life world and the (informational) social world deserves emphasis because it has
g
important methodological implications. A first, particularly striking implication shall be noted in concluding "step 2":
The use of the term "information" in describing biological ob
servations is, strictly speaking, metaphorical. The processes observed are material in nature. Molecules are arranged in spe
cific sequences. We, then, give the sequences typical for certain amino-acids the meaning of genetic information. But this is
simply our way of putting it. The criterion for the usage is the fact that it works for our - that is: the scientific - commu
nication, that it fulfills a function in the social world. The usage "makes sense", but it still remains an analogy or, at best, a homology between life world and social world. The same crite
rion of "making sense" can now be applied if the issue is the usage of observations from the life world to describe the social world. If it makes sense, then such usage is just as legitimate as using language from the social world to describe the life world.
Step 3: Persons, Conversations and Play
Step 2 - the introduction of a new theory of communication - has brought a clear distinction between the life world, for which evolutionary theory was designed, and the social world. We have now established that associations must be something made out of information, or, to be more precise, made out of messages. We do not perceive associations as something resembling organisms, and we do not perceive them as agglomerations of humans. We perceive them as identities which appear within out communication. They do not have to be flesh and blood, they only have to carry meaning.
Our next task, therefore, is to demonstrate the actual occurrence of such informational identities. Once we have established that committees are the informational units of action within associa
tions, we will be ready to tackle the final and most difficult question: how are committees able to maintain the information
necessary to reproduce their identities under conditions of in-
<r
formational entropy?
But back to the preceding question. Are there really "creatures"
in the world of messages, i.e. units of action which appear to reproduce themselves? Such creatures are much more common in our ordinary language than one tends to assume. In fact, we will use the common terms "person" and "conversation" to indicate our targets of observation.
Definition 1: A Social system (communication system) becomes a person, if identity is ascribed to it by an outside speaker.
The choice of the term "person" needs some explanation since its present use is quite varied. There is, firstly, the initial use of the term "persona" in the context of theatre i.e. in a context of playful adoption of a fictional identity. There is, secondly, the contemporary evolution of the "juridical person". The history of that notion shows in great detail how the attribution of iden
tity slowly detaches itself from physical characteristics and
begins to attach itself to formal and thus informational or fictional characteristics of identity (see Teubner, 1987a).?
As an example for the prolific occurence of persons we can refer to our case study committee (figure 1): A speaker ascribing
identity to the committee makes it a person - as we also did in part II. One can, however, just as well ascribe that identity to the BPI, or to the VCI, or to the corporations involved or to entire industries. There is no reduction to basic units, to indi
viduals. The committee consists of messages from firms, from other associations, from non-economic persons like the profes
sional association for industrial and intellectual property, or the Standing Advisory Committee to the European Patent Office.
There is also no need to know what the acting persons "really"
are, i.e. their material or psychical properties beyond their social identity.
Even though persons are, by definition, always fictions since they appear only through a speakers identity ascription, the recognition of such persons is not arbitrary. The special thing about the social world, as a world of communication, is the fact that messages occur within the units of action as well. The
identity of social units of action can therefore be confirmed by the ascription of those persons who communicate within a given social unit of action, e.g. the committee on industrial property within the German Pharmaceutical Manufacturers’ Association. In consequence, definition 1 must be complemented by
Definition 2: A social system becomes a conversation, if identity is ascribed to it by itself.
If a speaker inside a person refers to that person’s actions, he/she has a choice between referring to the person as "it" - thus differentiating between the speaker's self and the person's identity - and referring to the person as “we" - thus making his/
her own action of ascribing part of the person's actions. The ascribing statements are now statements within the context of a
person, within a particular informational identity. Such contexts are called conversations.
The choice of the term "conversation" rests on weaker ground. The term had its first flowering during the 18th century, when "les salons" of Paris emerged as recognizable social - political, artistic, etc. - systems. Modern communication theorists (Pask, 1975) have revived the term. It seems more adequate than "commu
nication" which remains as a term for the sum of all messages during a period of time, and more adequate than "discourse" which carries the connotations of a theory of communicative action
which explicitly ignores the non-identity of organic "life" and communicative "meaning".
We can now state two propositions which follow from the relation
ship between the two definitions.
Proposition 1: Every person changes to a conversation if the ob
server switches to the language of the conversa
tion .
Proposition2: Every conversation changes to persons, if the ob
server switches to the language of a non-identical (different) conversation.
Propositions 1 and 2 emphasize that it is the position of the observer which determines what he/she can observe, i.e. put into language.
To summarize: within a conversation, all actions initiated witho
ut (outside) this social system are ascribed to other persons, and it does not matter whether these persons happen to be humans, corporations, state agencies, trade associations or even more ephemeral constructs, like conferences, historical reunions, or purely imaginary conspiracies. The universe of persons is rich in appearances and in the levels of internal complexity on which these informational identities are able to reproduce themselves.
When a person is observed in terms that are not the terms of the
person's internal conversation, that conversation remains indes
cribable. All that may be observed are, again, persons acting within the identity one has set out to observe. Within an asso
ciation, for instance, we can observe the actions of committees, as they come to declarations which then determine the actions of the association. In a relational theory, one can only choose a focal unit (e.g., the BPI) which encloses internal units (e.g., the case study committee). In turn, the focal unit is enclosed by more encompassing social units (e.g. the conversation of the
Chemical Industry Association). All these units are fictional, but the novelty consists in taking these fictions seriously. The theory prescribes not to seek real individuals behind the fic
tional identities, but to observe the internal flow of messages which constitutes every conversation, including the conversation of science.
But how are we able to interpret actions, our own as well as
o
those of other persons, as being directed-towards some outside reality, and at the same time not referring to that reality but referring only to ourselves, the continuity of our conversations?
This question poses a serious logical riddle, and a sizable literature on the properties of self-referential statements has developed (Hutter, 1988: ch. 3).
Until the middle of this century, logicians recommended to avoid self-referential statements because they lead to "vicious circle paradoxes". In 1955, the anthropologist, psychiatrist and cyber
netician Gregory Bateson discovered that the use of self-referen
tial messages is common to all human as well as some animal so
cieties. The novelty consists again in taking familiar actions seriously: We customarily call such actions "play". Rather than evading or resolving the paradoxical statements, the ingenuity of play consists in reproducing the fiction upon which such actions are built. In this sense, every social system, every person is a play being enacted by the persons participating in the conver
sation that takes event. The accomplishment of play enables us to
continually reproduce statements which are both outside and in
side a conversation.
We can now be more specific in our characterization of "persons".
The conversation which takes place within every person is a play which produces sufficiently coherent actions to be recognized by other persons. Within an economy such plays can be best explored if we focus our observations on associations. Since markets, firms and associations are the three forms of economic self
organization whose evolution can be historically observed, every market can be characterized as a play, with set, yet flexible rules of the game, vocabulary, initiation rights and internal arbitrators. Every firm can be characterized as a play, with routines, repertoires, differentiated vocabularies and status rituals. But in choosing a particular person for further study, we decide on associations. The reason for the decision is the
informational nature of associations. Compared to markets, with their reference to tangible of intangible goods, and firms, with their reference to psychic objectives like profit and utility, associations carry out most of their transactions without market
transfers or team production. Therefore, it will be easiest for out yet fragile methodological faculties to discern the processes within such persons (or plays) without getting mixed-up in rela
tionships which belong to non-social worlds.
Step 4: Overcoming the Improbability of Self-reproduction through the Hyper-cycle
We now have gained an operational, testable description of "the unit which evolves". That unit is not a human gene which facili
tates behavior traits. That unit is a self-reproducing informa
tional structure, a person. Some persons call themselves indus
try, professional or trade association, and that particular form is our focus of observation. Associations, we now conclude, are the form of self-organization (person) which certain economic players, including whole industries take. Associations are, at the same time, the forum (conversation) in which the same players coordinate themselves.
It took considerable effort and the help of a number of neigh
bouring branches of sciences to establish this point. Still, there remains a basic empirical puzzle: How is it that all these persons are able to reproduce their identities? Why do associa
tions grow, why don't they disintegrate once the charismatic founder has died or the initial burning issue has been resolved?
Can they really pass on their genetic information, once that in
formation becomes too complex to be understood by any single one of the persons participating in a particular conversation? ' Again, we are dealing with a problem that is well-known in bio
logical research. Since it was pointed out above that genetic
"information" is really nothing more than a social analogy, it is not surprising to find that the problem has been compared to a childrens game (that is: a play!) called "silent telephone" (von Randow, 1978): One player whispers a sentence to a neighbouring player. This player passes the sentence on to the next one, until
the last player says aloud whatever remains of the original sen
tence. Here, as in the process of reproduction, the problem con
sists in finding a structure of cooperation which succeeds in maintaining the minimal information necessary, although every player knows only a fraction of that information.
The difficultly is aggravated if we assume that the players act selfishly or "opportunistically", i.e. the players deliberately distort information if they believe to derive individual gains
from such actions. And yet - the play goes on, the essential reproductive information is maintained.
A solution to the puzzle was suggested a few years ago when A.
Eigen and P. Schuster made a spectacular discovery in their studies of the self-reproductive processes in very simple life forms. There, the problem is exactly the same: How are the auto
catalytic reaction cycles within this organisms able to overcome the constant drift toward material deterioration and informa
tional entropy?
Eigen and Schuster (1977) were able to show that simple self
reproductive molecules, e.g. RNA phage viruses which live on bacteria are able to reproduce themselves because the autocataly
tic processes within the molecule fulfil one fundamental condi
tion: they are arranges in a structure which is called a "hyper
cycle" .8
Biological speaking, a hypercycle is a structural arrangement in which every one of the autocatalytic subunits or reactions cycles produces copies of itself plus an enzyme which influences the re
production of neighbouring reaction cycles (see figure 3).
Figure 3: Cooperation and Division of Labour in a Hypercycle
A catalytic hypercycle consists o f self-instructive units I, with two-fold catalytic functions. As autocalalysts o r-m o re gener
ally —as catalytic cycles the intermediates I,- are able to instruct their own reproduction and, in addition, provide catalytic support for the reproduction of the subsequent intermediate (using the energy-rich building material X). The simplified graph (b) indicates the cyclic hierarchy
Source: Eigen/Schuster, 1977; 545
Socially speaking, the hypercycle solves the information problem as it is posed in the silent telephone example: The solution is a
structure in which the "first unit" (arbitrarily chosen within a continuous process) helps unit 2 in formulating its section of the sentence through the knowledge of its own sentence segment;
unit 2 helps unit 3, and so on, until unit n helps unit 1 at a later point in time when unit 1 has again no other knowledge than that of its own sentence fragment. No subunit has an intrinsic advantage over the other units which would favour its separate survival more than that of the other.
"Thus, the sentence fragments can be maintained generation for generation in equal quality. The entire sentence can find its optimum because every one of its part does so, without crowding
Q
out each other" (von Randow, 1978: 22. My translation).
Step 5: Putting four steps together
Now that we have helped ourselves to this powerful explanatory tool, it is easy to return to our initial question: How can we explain the emergence and peculiar structure of associations?
Committees are the basic units, the reaction cycles which operate within associations. Every committee session is an act of a play with set rules and set participants or, as they called in the
theory, "internal persons". Associations emerge if committees learn to establish a hypercycle, i.e. if they learn to provide clues for the reproduction of other committees in exchange for clues that permit their own self reproduction. In every act, the messages (text, dialogue, discourse), directed to persons within the committee, confirm the rules of the internal game. The dia
logue produces also messages (decisions, understandigs, hints) which are understood by other committees. Other committes not only use that messages as a resource, as something which can be brought into their own play as a topic; they also use these mes
sages as suggestions for maintaining or changing the rules of their own play. Thus, the hypercycle of communication maintained by the committees constitutes and reproduces the associations.
The hypercycle organization of committees is the basic structural feature which enables associations to offset the constant proba
bility of loss of information through self-centered opportunism, in spite of a greatly increased number of self-interested per
sons. After all, the new theory not only recognizes individuals, but all other fictional players as well. Moreover, since messages crossing a boundary between social subsystems have a lower chance of being understood by a receiver, uncertainty is even higher for borderline events, such as contacts with the political system. By switching the axiomatic assumption of the theory from the integ
rity of the individual to the identity of autonomous social sys
tems10, we are able to understand how differences in their abil
ity to produce marginal information gains have made associations so singularily successful as forms of economic organization.
IV. Testing the Theory
Before applying a new theory to policy recommendations for the future, the explanatory power of the theory ought to be tested.
There are two basic strategies for finding the empirical material necessary to test the theory of part III: the first strategy is to search through existing literature on the structure and be
haviour of industry and professional associations. This approach makes use of previous search efforts, but its usefulness dimin
ishes as the focus of one’s own interest digresses from the authors* concern. The second strategy collects evidence through direct observation of specific associations. Apart from the high production costs of this approach, there is the problem of gen
eralization of results. We will use both strategies.
1. Existing Literature
A number of cases are reported which illucidate the conditions for the emergence of associations. Schulz (1979) reports that industry associations were founded in the 1880s as a counter
movement to employers' coalitions, notably unions. Fischer (1979) reports the founding of the earliest associations as a reaction
to the emergence of a political entity, the Zollverein, which raised a number of previously unknown issues. Buchholz (1969)
reports a "wave of concentration" following the initial • incorpo
rations of associations. These events can be interpreted as a breakthrough of the new code, i.e., the proliferation of a cer
tain new kind of social organization.
The most detailed discussion of the need for "issues" to sustain an association during the first phase when internal communication has not yet been stabilized is found in Wilson (1973).Buchholz
(1972) describes the various functions of "self-help" or internal communication which are characteristic for mature associations.
Groser (1985) focuses on the "dilemma" of self-regulation in the German Association of the Pharmaceutical Industry. In terms of part III, he talks about the relationship between association committees and participating firms.
But committees are hardly ever explicitly mentioned in these accounts. The most notable exception to the rule is Moe (1980) who devotes a chapter to the function of "sub-groups", as he calls them. He reports that the relevance of small groups within associations has been demonstrated, and that the "affective base"
of the relationship between sub-group members is well illustrated in the literature. Moe’s central category is "cohesion": "This is the factor of primary importance, since it is agreement among in
dividuals that makes concerted action possible in the first place" (p. 88). "In shaping the role of sub-groups in internal politics, cohesion is at once the key to power and the major stumbling block" (p. 90). Moe also notes: "Mechanisms of communi
cation, the administration of members’ benefits, the ecology of member sub-groups, and patterns of relationships with outsiders ... have significant effects on decision-making, goals, and the prospects for group democracy" (p. 226). Traxler (1986), however, maintains that 17 out of 28 investigated Austrian industry asso
ciations have no form of subunits.11
One could continue this survey albeit with rapidly diminishing returns of information. The propositions of part III seem not to
be falsified, in the contrary, a number of implications are cor
roborated. For a study of committee relationships, the existing
literature is not sufficient. .
2. Observing a Committee at Reproductive Work
Returning to figure 1, we can now imagine the process, the con
versation that takes event within the committee on industrial property, our case study committee.
Messages from the outside are used as topics for the ongoing play. The members go through the session, following their own rules, arriving at understandings, protocoils or resolutions. The internal messages become part of the topics of other committees not only through media transmission, but predominantly through multiple committee membership.
Here, we are back to the peculiar structural of feature which we set out to explain in part II. Multiple committee membership seems to be the central organizational feature which enables several committees to insure their common survival. But at this point, we also make a rather surprising discovery: Multiple mem
berships are most frequent across associations. In consequence, the hypercycles of reproduction are not functioning predominantly within clearly identifiable associations. They are functioning between committees of separate associations which are connected through the similarity of their topics.
We can deduce: Not associations, as separate identities, repro
duce themselves. What is being reproduced is a conglomeration - more appropriately: A tissue of associations. 12 The information
links within association committees become to weak once the pro
ductive units exceed small numbers. The use of similar issues in neighbouring associations strenghtens the information link suf
ficiently to overcome the improbability of association structures as complex as those which we observe in and around the case study committee.
V. Policy Recommendations
1. Objectives and Tools •
After having developed a positive theory of economic associa
tions, we can now tackle an intrinsically normative question: If some social actor, either within an economy or within a political system, has the intention to influence the development of a cer
tain sector of that economy - what new actions, strategies, poli
cies etc. can an economist recommend on the basis of this theory?
It must be emphazised that policy makers can be located within as well as outside of the economy. A positive theory of economic associations is useful to association members and to association committees as well as to legislatures, regulatory agencies and political parties. But their positions vis-a-vis associations are
fundamentally different. Therefore, their objectives and abili
ties will differ widely. The recommendations of the theorist must reflect those differing positions. The following argument assumes an outside policy-maker - a fictitious regulatory agency, or a legislature.
In order to answer the introductory normative question, it is useful to split it into two. The first question is: What is it that the policy maker ought to do? The second question is: What is it that the policy maker is able to do?
Asking for the objectives of policy makers has found extensive answers in the literature. The traditional justifications for an interference of political persons with the economy can be grouped in two categories. Category I contains a variety of constella
tions in which the "market fails". Scherer (1980) lists three of the major cases: Natural monopoly, external economies and diseco
nomies, and informational disparities between sellers, or between sellers and buyers. In this category, the interference of the policy maker is justified on economic grounds. A certain standard of efficiency, based on widely excepted values, is not accom-
plished in free competition and is therefore targeted for "im
provement". Category II contains so-called "meritorious goods".
Here, the justification is on political grounds. Within the po
litical system, the merit of education, equal opportunity, human rights, etc. is established. To the economic or scientific ob
server, these merits are given. It remains to be clarified, how
ever, at what cost the economy is able to satisfy the political demand for such goods.
The new theory does not suggest that these objectives ought to be changed. They are basically sound and the most relevant cases for political intervention are sufficiently obvious to not require additional scientific reasoning. The much harder problem is the second question: What measures and strategies are at a policy maker's disposal? How competent is the policy maker in handling these tools? The history of public regulation is a history of good intentions and bad results - sometime so bad that current thinking favours a policy of strict non-involvement instead of
inept intervention.
One of the major shortcomings of political policy makers is sum
marized by Scherer (1980: 486):
"Regulatory agencies characteristically suffer from severe infor
mation handicaps relative to the businesses they are regulating, leading to mistakes and capture".
The reference to "information" rings a bell: If associations are devices to process a wider range of information more effectively, then they deserve explicit consideration within the repertoire of regulatory tools. But, as we shall see, self-organization through associations is not just another tool. It is a new way of looking at the question of regulatory action.
2. What is to be done? Strategic Considerations
2.1 General remarks •
The general direction of any strategy was indicated in part III:
Associations are plays perceived as persons, and associations participate in plays perceived as conversation. The task is to instigate plays, well-knowing that the instigator (policy maker) is one of the players.
The emergence of play has been explained as a process which has the same informational structure as a biochemical hypercycle. In consequence, one can appropriately compare associations with bio
chemical devices. A policy maker, then, has to evaluate the dif
ference between using a mechanical tool or using a biochemical device. The biochemical device is a superior choice in many here
tofore informationally intractable contexts, because the uncer
tainty of future events, of yet unknown new knowledge, can in such cases best be matched by the uncertainty, the autonomous behavior of self-organized industries.
The magnitude of the choice that becomes available to the policy maker can be illustrated with a metaphor that takes its cue from Coase1s conflict between a farmer and a rancher: Regulation meas
ures are like fences to constrain a rancher’s cows. Using asso
ciations is like using watchdogs in order to control the cows.
The switch is a switch from the study of mechanical devices to the study of autonomous, self-organized systems.
If associations are not mechanical devices but autonomous sys
tems, then we have to identify methods of "breeding" and "nur
turing" such social organisms, but also methods of "containing"
and "pruning" them.
Just stating the general value of the "association option" is hardly enough. At this point the consultant turns into a coach. A policy maker must'trained to do its job as an instigator of and participant in plays.
This paper is not the appropriate place to develop such a train
ing manual. But the major strategic considerations will be
briefly presented. .
The policy maker plays with other players, among persons who are potential players. We will call this skill "therapeutic inter
action" and discuss it in section 2.2. The policy maker also channels - or directs - the diverging interests of all players into a structure and sequence of events which can then be experi
enced by themselves and others as a "performance". We will dis
cuss this skill in section 2.3.
2.2 Therapeutic Interaction
The relationship of play implies a strict respect for the auton
omy of all other players. None of the players can be forced to do something. As soon as a person is forced, it loses its quality as a player and becomes an instrument, a resource. The strategy of influence which remains can best be illustrated by reference to the relationship between a doctor and her patient. The task of the psychotherapist, for instance, consists in involving another person in a conversation in the course of which the "patient" be
gins to reinterpret his own context and thus begins to see his own future "in a new light" (Hutter, 1986b). If the therapist were to coerce the reactions of the patient, the change of behav
ior would be achieved at the cost of a dependency on the thera
pist.
The recognition of the inevitability of therapeutic interaction is a basic strategic consideration for every policy maker, es
pecially for regulatory agencies. If interference with other persons - be they large corporations, small companies, trade associations or legislators - occurs in this form (see also
Teubner, 1987b), then the effectiveness of one's own actions can be increased by improving therapeutic skills.
The argument developed above is not unknown in the literature.
Persons working within regulatory agencies very frequently frame
their description of events in the terms of a play. Empirical research, as well, confirms that regulatory actions are more effectively defined as "negotiation processes" with partners
rather than as the imposition of standards and tolls on impassive subjects.14
What can be said about the specific features of therapeutic in
teraction, once the strategy is applied to the regulatory "game"?
The discussion of this question is in its beginning stages. Two features can be differentiated.
1. Issues and Partners
In part III, particularly in step 4 , it was explained how commit
tees use messages to continue their internal conversation and make themselves useful to others in the association. "Issue" is the term chosen for some particular constellation of messages which is recognizable for committees and deemed understandable for others. Issues, just as persons, are fictitious. Their recog
nition is an effort on the part of the observer. Still, the emer
gence of issues can be influenced by the players. They can empha
size, elaborate, respond and, above all, give names to particular sequences of events. As long as issues arise, partners in commu
nication have something to deal with, and they need the flow of issues to stay alive (!). In terms of evolutionary theory: there must be a flow of variations of issues entering the internal con
versation of an association.
The effort of the policy maker does not necessarily have to be directed towards the shaping of issues. In some cases, it may be more appropriate to help the emergence of new players. To ex
plain, let us step back to the notion of the policy maker
"playing with other players and with potential players". The majority of the persons in the environment of the policy maker are not players in the plays of the policy maker. But by deciding
issues accordingly, such persons can be drawn into the play.
Moreover, completely new persons with the explicit purpose of participating in the regulatory play can be made to emerge. Such
a strategy of increasing the number of players seems patently foolish under the traditional strategic principle of "limiting uncertainty". As we shall see in section 2.3, the•complexity of communication in any sector of the economy can best be matched by increasing the complexity of "diverging" interests.
Again, a short look at the history of associations confirms the argument. There are many cases reported where the appearance of new laws or new political entities has instigated the formation of associations (Zollverein) and a change of purpose in existing
associations (labour unions). There are other examples where as
sociations and/or political actors have worked to arrange "facts"
in an order which can be recognized as an "issue".15
2. The "By-product Habit"
In the regulatory play the policy maker's actions are moves, just as the actions of any other player. In other words: No action can be evaluated at "face value". There is no clearly defined end to be reached by a certain measure. In play (to use Bateson's exam
ple from the animal world) "the nip does not denote the bite".
(Bateson, 1955:182). In the same manner, every action of the po
licy maker will be interpreted differently by different players, depending on their possible move. To give an example: The an
nouncement of an agency to reduce air pollution by imposing tech
nical production standards is only by naive outsiders interpreted as a prediction of an event in the near future. By all the
players in that industry it is evaluated as a signal that is meant to interest the media, or to speed up self-regulation, or
to placate the legislature, and so on. 16 It follows that every move must be judged on its own terms. One estimates the effects, the "by-products" of the move rather than its intended relation
ship with a given end.
2.3 Diverging Interests^?
In 2.2, the creation and recruitment of new players was dis
