Institutions: Meaning, Characteristics, Role and Other Details!

Things to Know # 1. Meaning of Institutions:

Man is a social animal. Being social creature, he has some wants and assigned aims to comply them.

Institution is a way of thought or action of some prevalence and permanence, which is embedded in the habits of a group or the customs of the people.

Hence, it can be claimed that institution is that which people adopt to means for fulfillment of needs and objectives with procedures and behaviour.


In simple words, institution is another word for procedure, convention and arrangements.

To put in the words of E.S. Bogardus, “A social institution is a structure of society that is organised to meet the needs of people mainly, through well established procedures”.

According to C.H. Cooley, “An institution is a complex integrated organisation of collective behaviour established in the social heritage and meeting some persistent need or want.”

Similarly, Fichter describes an institution, “As a relatively permanent structure of social patterns, role and relations that people enact in certain sanctioned and unified ways for the purpose of satisfying basic social needs”. In the words of Prof. Elwood, “An institution means the way of rituals of living mutually which are established, accepted and arranged by the force of community.”

Things to Know # 2. Characteristics of Institution:

On the basis of above definitions, main characteristics are as under:


(а) Institutions are purposive in the sense that each has its objectives or goals to satisfy social needs.

(b) They are relatively permanent in their structure.

(c) They tend to become traditional and enduring.


(d) Each institution is a unified structure and functions as a unit.

(e) The institution is necessarily value laden and tends to become a code of conduct.

(f) Each institution is affiliated and derive rights from some or other society.

Things to Know # 3. Role of Institutions in Economic Development:

A country’s social and economic institution dominate the process of economic development. They determine attitudes, motivations and conditions for development. If institutions are elastic and encourage people to avail economic opportunities and further to lead higher standard of living and inspire them to work hard, then economic development will occur.

On the other hand, if they discourage all this, the economic development will be hampered and adversely affected. This has been rightly observed by UNO that economic development is impossible in the absence of appropriate atmosphere. So economic progress will not take place unless atmosphere is favourable to it.

The people of the country must desire progress and their social, economic, legal and political institutions must be favourable to it.

Emphasizing the significance of these institutions in economic development, Prof. A.K. Cairn-cross says, “Development is not governed in any country by economic forces alone and the more backward the country, the more this is true. The key to development lies in men’s mind, in the institutions in which their thinking finds expression and the play of opportunity on ideas and institutions.”

Therefore, right king of institutions or growth promoting institutions are a pre-requisite for the rapid economic development of a country. These institutions may be called growth promoting which permit or stimulate, rather than impede, the adoption of new techniques and the formation of productive capital.

In a broad sense, institutions promote economic growth to the level that they associate efforts with regard to permit increased division of labour, expansion of trade and freedom to seize economic opportunities.


In this regard, Prof. W.A. Lewis observed, “Institutions promote or restrict growth according to the protection, they accord to effort, according to the opportunities they provide for specialization and according to the freedom of action they permit.”

If institutions are favourable, will to attempt economic development is intensified and it increases.

If this willingness is strong, institutions will be re-modeled to accommodate it. Growth promoting institutions may so structure the environment in which factors of production meet that the rate at which combinations occur, is accelerated. This acceleration might involve the discovery of new types of factor combinations or an increase in those already known.

According to Prof. W.W. Rostow, “For economic progress, a country must have timely changes in people’s tendencies and needful improvement in social institutions and appropriate changes in political and social conditions.” Thus, it becomes important to recognise that the socio-political environment may or may not be conducive to economic progress.


Certain religious and social attitudes are more favourable to development than are others.

For instance, an individualistic pattern of family; freedom of action for the individuals; high social values for business; flexible social structure are definitely much more conducive to development as they all create conditions for accelerated growth in the economy while, joint family system, low social value of business and rigid caste structure are common elements of backwardness and retard economic development of a country.

Thus, institutions greatly influence economic growth through the influence on the rate of capital formation, growth of entrepreneurship, technological change and the desire of the people to work.

Sometime, the pattern of investment is a function of political, cultural and religious motivations but institution and the value system also determine the supply of entrepreneurs which are the captains of the economic and social change. In this way, institution exercises a decisive influence on the rate of growth of an economy.

Things to Know # 4. Impact of Institutions on the Growth of Economic Development:

1. General Attitude to Economic Effort:


Institutions have greatly influenced people’s attitude towards work, will and efficiency for economic development. They will be growth oriented if they inspire people to work hard to undertake risks. If they do not do so, they will be growth retarding. This mean that institutions promote or restrict growth to the extent, they accord protection to effort.

In this connection, Prof. W.A. Lewis writes, “Men will not make effort unless the fruit of that effort is assured to themselves or to those whose claims they recognised.” Therefore, the institutions must establish some sort of relationship between effort and reward in order to get economic growth.

For this, nobody should be allowed to share the earnings of others and suitable differentiation in remuneration must be maintained according to effort. The institution of private property, economic freedom and laws of inheritance boost economic development as they ensure reward for effort and provide freedom of action.

While, on the other hand, exploitation of labour, defective land tenures, absentee landlordism, feudal system, slavery, joint family system and casteism all subdue the incentive to make economic development.

2. Technological Knowledge:

As there is lack of technical knowledge in under-developed countries, resources are lying unutilized and strict institutional structure is not in a position to accept technological change.

Scientific attitude of the society can go a long way in bringing at such a change. If there is favourable change in the institutional structure, there can be an atmosphere for progress all round and with the development of technical knowledge favourable changes occur themselves.


In this way, there is ample chance to utilize abundant capital and special emphasis on research are other requisite conditions for development and use of new techniques. In fact, institutional structure must be favourable to the commercialization of high entrepreneurial class. Hence, it is clear evidence that social institutions have been much influenced by technological changes for economic progress.

3. Entrepreneurship:

The growth of entrepreneurship of a country depends on its institutional structure and value system. They are necessary for the automatic increase in supply of entrepreneurs. Therefore, high suitable prestige and suitable reward is the foremost condition for the success of entrepreneurship. Less restriction be imposed and excessive taxation may be avoided.

An effective supply of entrepreneurship will only occur in a society if accumulation of material wealth well up in its hierarchy of social values and confers sufficient monetary rewards to the successful entrepreneurs. It is called ‘pecuniary culture’ which helps to smooth the path of the entrepreneur, channelizing his energy and motivation in commercial, financial and industrial directions.

To put in the words of Prof. D. Bright Singh, “For self development in enterprise and risk, social and institutional terms must be fulfilled.”

4. Labour Productivity:

The social set up of a country affects the productivity of labour to a considerable extent. Meritorious development of labourers is not possible due to unfavourable change in social institutions. This means that the size and quality of labour force are greatly influenced by social institutions and value system in a society.

Therefore, to raise the productivity of labourers, it is desirable traditional customs and social institutions. They not only determine the size of the labourers but also influences its productivity. Mostly in under-developed countries, many institutions are prevalent which are harmful for labour productivity.


Some of such institutions are joint family system, family attachment, traditional values, contentment, minimum wants, caste system, religious feelings and principle of equality in the distribution of property etc.

5. Saving and Capital:

The institutional structure of a country exercises a great influence on the will and power to save and capital formation. To promote capital formation, proper legislation protecting the right to property should be made. In other words, suitable institutions must provide legal security to protect private property against misuse by the government and of government property by individual.

If institutions pay due honour to material capital, then investors are encouraged to invest their money.

Consequently, society will also save and rate of capital formation will be stimulated accordingly. Hence, people’s sense of conducts, behaviour, customs gets appropriate changes in accordance with institutional structure of the society, thereby social institutions have imperative influence on saving and capital formation.

A study of UNO reveals that for attaining economic development, social value and institutional structure need timely change.

However, its report conveys, “Rapid economic development is impossible without painful changes, traditional philosophical thoughts should be discarded, old institutions need to be disorganised, caste and class bondages should be abolished and large number of people, who are not up keeping with progress will have to abandon hopes of own luxurious life”.


In the same manner, Prof. Rostow favoured changing attitude of the society in order to promote investment. Emphasizing this aspect, he stated, “The rise in the rate of investment requires a radical shift in society’s effective attitude towards fundamental and applied science; towards the initiation of change in productive techniques; towards the taking of risks and towards the conditions and methods of work.”

Things to Know # 5. Some Institutions and Economic Growth:

1. Private Property:

The institution of private property possesses a significant influence on people’s desire to work hard, to save and invest. It is a legal right to have private property by which people have full independence to use and acquire the property and are restricted to use of other’s property. The right of property may rest in a private person or in a group or in a public authority.

According to Prof. Lewis, property is a recognised institution in the world; without it the human race would have made no progress whatsoever, since there would have been no incentive to improve the environment in which one lived. Institution of private property initiates people to work hard, to accumulate wealth and invest their savings.

Further, it also facilitates the growth of entrepreneurship. But on the other side, the right of private property is not found in socialist countries. These socialist thinkers feel that the institution of private property hinders the economic development and sense of private profit leads to improper competition and centralization of property increases the tendencies of inequalities in society.

This does not mean that the institution of private property is not useful. In fact, it influences the human attempts very much.

2. Caste System:

The caste system which prevails most of the under-developed countries, also creates hindrance in the path of their economic growth. Caste system is a strict social classification that limits the person’s senses and brings obstacles in the right atmosphere for development.


In a society with a rigid class structure, where social status is determined at birth, it is difficult to raise one’s income as it checks occupational mobility of labour.

This further diminishes efficiency and productivity of labour. It has resulted in creating prejudices against doing various kinds of work.

Besides, due to social classification, a scheduled caste comes up which has low social status and causes much abuse to human resources. If, by chance, people of higher status are seen doing manual work, are supposed to lose respect.

It is because of this, white collar jobs are more popular with the educated persons of middle and upper middle classes. Prof. Lewis quoted the example of engineers in less developed countries, who will not do any work which will spoil their hands. In this way, caste systems has weakened people’s incentive to work hard, which, in turn, is an obstacle in the growth of entrepreneurship.

Therefore, common masses remain tied to occupation for which they have no talent or which they perform as a family or caste occupation. As a result, such occupational rigidities dampen the spirit of enterprise and do not create an atmosphere of change in the economy.

3. Joint Family System:

Another major institution which has the capability to affect economic development is joint family system. In a society, it is very much effective that influences the incentive for labour mobility, people’s attitude towards work, development of diligence, rate of saving and investment.

The experience in different countries shows that the individualistic system of family is growth promoting, while joint family system is growth retarding.

Individual is more responsive and the other is lazy and there prevails neutrality towards decisions and all decisions are done by the head of the family. In a joint family system, more persons are dependent on fixed income and whereby scope of saving and investment is limited which leads to lower rate of capital formation and dependents become inactive.

In short, it is said that it neutralises the market incentives to labour mobility. Prof. Meier and Baldwin have rightly observed, “The cultural and psychological factors operating in poor countries may be more influential than wage rates in determining the supply of labour. The presence of institutions and attitudes associated with the family system, caste system or village system may account for occupational immobilities.”

In this way, we can safely conclude that the institution of joint family system is a hindrance in the smooth functioning of growth while individualistic system of society is conducive as it promotes entrepreneurship.

4. Law of Inheritance:

The law of inheritance is capable to influence the economic development of a country because people have full faith in the principle of inheritance. According to this law, after the death of the present property owner, it will be distributed among different inheritors including sons and daughters.

This division of property especially agricultural land, there is acute problem of sub-division and fragmentation which results in lower productivity and further in the diminution of value of the property and decline of income that influences the quantity of capital and saving in society. But on the contrary proper laws of inheritance initiate people to work hard and acquire, wealth and property.

In some countries, there is law of primogeniture which confers the right of inheritance only on the eldest son, is said to be more conducive to economic growth as it results in large to work hard and take interest because all members in the family are not assured a share in family property.

At the same time, it is argued that this law is not based on social justice and creates more problems rather than being helpful to promote economic development.

5. Religion:

In the opinion of Prof. K. William Kepp, “In under-developed countries religious institutes are responsible for slow speed of economic progress.” Therefore, religion in a society affects the tendencies and the views of the people which influence more the atmosphere of economic development and extension of economic activities. It can be indirectly a hindrance to promote economic development.

Economic growth requires that people should be willing to give their mind to ways of increasing productivity. It must motivate people to assume new tasks and undertake risks. It is only possible by the spirit of religion which can infuse the feeling which can be considered helpful to economic advancement. In brief, religion is helpful to create inspiration for economic development among people.

This idea has been expressed by Prof. Lewis who says, “If a religion lays stress upon material values, upon work, upon profit and productive investment, upon honesty in commercial relations, upon experimentation and risk bearing and upon equality of opportunity, it will be helpful to growth whereas in so far as it is hostile to these things, it tends to inhibit growth.”

The experience of various countries shows that some religions are growth promoting and others have hindered economic development. According to Max and Weber, Protestant ethic played a significant role in the development of western countries.

This new religion created a spirit of questioning traditional values among common people and promoted development of rationalistic and individualistic approach to various problems.

The religion in Japan, was also helpful in economic development as it also created similar attitudes among the people as were created by Protestantism in western countries. As opposed to this, Confucianism in China has hindered the economic growth by stressing over contentment and simplicity in life.

In India, religion has been the great hindrance in the path of development as it favoured asceticism and other worldliness and discounted economic pursuit. The doctrine of Karma made people defeatists and they have developed negative attitude towards life.

6. Attitude towards Work:

The attitude towards work and aspiration of the people are other crucial factors which determine economic development in a society. In a sense, people’s attitude and motivation to work are determined by material gains that are likely to get for their hard labour. In this regard, Prof. Lewis has pointed out that men will not do their best work, unless the fruits of their labour are assured to them or to their heirs.

Therefore, material rewards provide the strongest motivation to work hard and take initiative. But, it must be remembered that the strength of this motive will largely depend on the religions attitudes and cultural pattern of society. In many underdeveloped countries, ascetic attitude is the common feature which weakens the motivation for material efforts as it involves the subordination of material wants.

Things to Know # 6. Need for Change in Institutional Structure:

On the basis of above cited discussion, it can be said that social institutions play a vital role in the economic development of a country. At the same time, in under-developed countries, there are certain social institutions which create obstacle in the path of economic growth. Thus, question cannot be ruled out that these institutions need radical change to promote economic growth.

Prof. Meier and Baldwin also stressed the need of change in the institutional structure. They opined that, “Economic development of sufficient rapidity has not taken place within the present cultural framework. New wants, new motivations, new ways of production, new institutions need to be created if national income is to raise more rapidly.”

The transition from a traditional agricultural sector to a modern industrial economy must necessarily involve tremendous radical changes in the existing set up of the society, social attitudes and motivations of the common masses.

In a study, United National has correctly pointed out, “There is a sense in which rapid economic progress is impossible without painful adjustments. Ancient philosophies have to be scrapped; old social institutions have to disintegrate; bounds of caste, creed and race have to be burst; and a large number of persons who cannot keep up with progress have to have their expectations of comfortable life frustrated.”

To bring change in social structure is an extremely difficult and long term process as any such effort is bound to be resisted by some reaction in the society. Any abrupt change in the socio-economic structure is fraught with dangerous consequences. It is always resisted by those whose social status is adversely affected by it.

Regarding this, Prof. Gunner Myrdal has aptly remarked, “Economic policies are undoubtedly easier to carry out than are social policies that challenge vested interests, violate deep seated inhibitions, offend cherished traditions and beliefs and work against the heavy weight of social inertia.” Therefore, any change in socio-economic structure needs a slow pace of process.

It does not imply a rapid overthrow of the existing pattern but the process must be evolutionary otherwise it will result either in apathy or revolt.

Francis Hsu has pointed out, “It took Europe ten centuries or more to produce an individualistic orientation of life which bore fruit two hundred years ago and there does not seem to be any way in which a similarly orientation could be generated in a matter of years or even decades.”

This does not mean that there should be no social change in a society. In fact, institutional change is a pre-requisite for rapid economic growth. In a sense, all resistance and sacrifices involved should be considered as a cost of the development process.

Prof. Okum and Richardson have studied that there are values and institutions, many of which prevail in less developed countries, that offer resistance to economic growth; their alternation or elimination, after a painful process, constitutes a ‘social cost’ which a country must bear as part of the price for development.

In the same fashion, Second Five Year Plan of India was convinced of this fact and made it clear that the task before an under-developed country is not merely to get better results within the existing framework of economic and social institutions but to mould and refashion, so that they may contribute effectively to the realization of wider and deeper social values.

In India, various social institutions such as joint family system, caste system, law of inheritance, religious tendencies, child marriage and veil system had influenced country’s economic development considerably. This has obstructed the rapid speed of development of modern technical knowledge.

As a matter of fact, modern technology, developed agricultural machines, qualitative seeds and chemical manures are used still in a limited quantity. Caste system and joint family system have restricted the movement and efficiency of labourers. The law of inheritance has misappropriated the property and land productivity is influenced by fragmentation and sub-division.

Joint family system, child marriage and compulsory issue system has led to rapid growth of population which has, in turn, given birth to other countless problems of housing, food crisis and unemployment etc. Therefore, we can say that Indian economy has been ill affected only due to old and rigid institutional structure.

Thus, need for social change cannot be denied. But at the same time, it is the need of the hour that human discontentment should be avoided at all costs and these changes should be introduced in such a manner that may disrupt the existing culture as little as possible.

So cultural change must be selective and rapid progress will occur by making the maximum utilization of existing system rather than by attempting a frontal breakdown of the culture and institutional set up.