The significance that social, political, and economic systems have in how businesses and governments function and acquire authority is the subject of institutional theory. These regulations apply to both formal and informal entities, such as the government, the corporate sector, and households. The institutional theory describes how and why change happens in organizations, as well as why some organizational methods and structures persist.
According to such theory, governments’ objective is to serve their citizens and voters and put their interests first. On the other hand, as per traditional systems and structures, corporations have to serve their customers and prioritize the interests of their clients and stakeholders. In this sense, both firms and governments have their obligations to either customers or citizens, and without certain accountability mechanisms, such priorities can shift, focusing on more corrupt, self-centered, and inefficient systems.
First, there are systems and mechanisms that monitor and regulate the activities of political and economic forces, which promote accountability. By developing systems of control, motivation, and responsibility that compel organizations and the people, they serve to achieve ever-higher standards of performance at the workplace, in the classroom, in the playing area, as well as in their personal relationships.
In contemporary societies, authorities should be re-elected if they boost expansion and enhance infrastructure (Brett, 2009). Businesses must only continue to thrive if they offer reasonably priced goods, and civic organizations and nongovernmental organizations should only keep their donations and participants if they deliver better public services than potential competitors (Brett, 2009). Lastly, partners should only remain together if they appreciate each other’s wishes and requirements.
When it comes to the extent of control, political evolution entails a shift from command-and-control to consensus-based systems of government. This has organizational and geographic ramifications since it necessitates authority structures that function at the local, national, and international levels, as well as those that enable independent interconnectedness between individuals and organizations (Brett, 2009).
Liberal nations, such as the U.S. or European nations, do this by creating institutions that hold people and authorities responsible through democratic marketplaces, require them to recognize the independence of commercial entrepreneurs and their own authorities and expose them to the legal system (Brett, 2009). In turn, a business is made up of the network of connections that develops when an entrepreneur is required to allocate resources (Coase, 1937). The extent of control of such an entity is limited due to competitive markets. In this sense, businesses can control prices and customers to a certain extent in the view of competition.
However, in order for accountability mechanisms to work, there have to be certain circumstances. For example, the greatest way to control accountability and allocate resources, according to liberal theorists, is through completely competitive markets since they increase autonomy, effectiveness, fairness, and interdependence by providing individuals the freedom to make their own decisions and so be an independent generator of activity (Brett, 2009). Unlimited access to all marketplaces eradicates monopolies and lowers costs and prices, while the public nature of exchanges inside a competitive industry omits the requirement for power structure and the potential for exploitation (Brett, 2009). Participants can also make rational decisions about how to use their own assets and prevent being taken advantage of by others owing to sufficient data.
In turn, for governments, liberal democratic institutions are necessary for the establishment of robust accountability mechanisms. The goal of liberal political philosophy is to develop solutions to balance the necessity for national sovereignty with the right of individuals to liberty (Brett, 2009). Liberal institutions can only be realized in specific traditionally formed circumstances in which the required standards have been created by a long and still developing process that includes social experimenting, scientific study, and competitive markets (Brett, 2009). This is because liberal institutions’ assertions to achieve maximum freedom and efficiency can be empirically justified. Without liberal democratic institutions, the government system will be susceptible to issues that will inhibit prioritizing the interests of the nation.
Still, it is noteworthy that accountability mechanisms change depending on the institutional environment of the country. For example, in Viacha, a powerful Cervecería Boliviana Nacional operated as a monopolistic financier of the regional party system, which stifled political rivalry, eventually discouraging people from casting their ballots (Faguet, 2009). A split of civil society, consisting of traditional and contemporary peasant groups as well as urban and rural groups, was ill-equipped to combat this destructive effect (Faguet, 2009). Local governance thus became corrupt, ineffectual, and unaccountable.
Contrarily, in Charagua, diverse cattle farmers made up a competitive private market that fostered competition and entrepreneurship in politics (Faguet, 2009). This resulted in political responsibility and, as a result, reactive, egalitarian policies, which were themselves supported by organized, civilized society (Faguet, 2009). As can be seen from the examples, under weak institutional structures, the organizations had several options, and yet while one city managed to have a decentralized system and competitive market, another one became a corrupt municipality.
Hence, both businesses and governments have responsibilities to their constituents, and without certain accountability measures, these obligations might change, concentrating on more dishonest, selfish, and ineffective processes. First, there are oversight and control systems for political and economic forces that encourage responsibility. These systems of command, incentive and accountability serve as the foundation for these processes. Political development involves a change from command-and-control to consensus-based forms of governance in terms of the degree of control. The network of relationships that forms when an entrepreneur must distribute resources, in turn, makes up a firm. However, certain conditions must exist for accountability systems to function, such as competitive markets for businesses and liberal democratic institutions for governments.
References
Brett, E.A. (2009). Reconstructing development theory. Basingstoke: Palgrave-Macmillan.
Coase, R.H. (1937). The nature of the firm. Economica, 4, 386–405. Web.
Faguet, J.P. (2009). Governance from below in Bolivia: A theory of government with two empirical tests. Latin American politics and society, 51(4), 29–68. Web.