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  • Mike Klassen & Mike Field

The Long Game: Institutional View of Market Systems and 'Large Group' Dynamics

This post is the first half of a two-part series. To view the second post, click here.


The field of market systems practice has embraced complexity thinking in recent years. In general, this is a great thing: acknowledgement of complex and multidimensional causes, the internal drivers and momentum of systems (with or without us as development actors), and the unpredictability of response help keep our egos in check. However, while we have embraced complexity, we continue to ignore the important and difficult task of emergent trade-offs that a society has to deal with as it develops. So, while ardent supporters of complexity often say, “it’s better to let the system itself decide,” the decision to intervene in another country is itself a normative act. We need to take ownership of this, and increase our willingness to stake our assumptions around the effects of system change outcomes and whether they are contextually better or worse for a given society. To do this thoughtfully, we need a better framework for evaluating the underlying institutions. When complexity is combined with institutional thinking, the framing can provide greater clarity on system dynamics and how a given change would likely result in some trade-offs, which can then be assessed as better or worse, thus allowing a project to either amplify or dampen signals favoring the change.

For the past six months, a team has mined academic sources to investigate possible frameworks that can help explain the deeper social and cultural norms and institutions that underpin market systems. While that work focuses on inclusive, entrepreneurial market systems in the context of enabling environment reforms, we think it has wide applicability to all market systems programs. This blog post introduces the two big ideas we propose as the basis for an institutional view of market systems: (1) small group vs. large group thinking, and (2) regulative, normative and cultural cognitive institutions. We then sketch out how these could be used by managers making decisions about allocating resources in a market systems program.

Small group vs. Large group

The distinction between small group and large group societies or institutions is best articulated by David Rose:

An important step in the economic development of any society is being able to move from only being able to support personal exchange to being able to support impersonal exchange. A completely small group sense of morality is adequate for personal exchange but becomes increasingly inadequate as exchange and cooperation becomes impersonal because it is conducted in larger group contexts. (Rose, 2011)

Large group societies allow risk management at a societal level, through institutions that evolve to support impersonal exchange and trust in society beyond simply personal relationships. In contrast, small group societies centralize resources and control, and rely on strong family and kinship ties, mitigating risk at the level of the small group. This can be an incredibly important community-level safety net, but it leads to exploitative relationships as it is deemed morally acceptable and even important for members of a community to extract resources from those outside their group in order to support their own. When small group institutions dominate, it is typical that higher-level ideas of merit are devalued, and substantial segments of society are blocked from meaningful participation as power is wielded to the benefit of the smaller group holding power.

Broadly, ‘development’ can be thought of as the trajectory from mostly small group societies to large group societies, however this is not a simple, one-way path. There is no easy transition from a low-income authoritarian government to a society where rule of law is respected and equity is enshrined in cultural and legal norms. The process of change creates winners and losers, and these are important trade-offs we need to reflect on in our work. It’s also important to note that countries can move in either direction - in recent years there is a clear trend toward populism and authoritarianism – most starkly in Hungary and Poland, but also in countries like the US and UK – which can be seen as manifestations of small group thinking.

Ultimately, the small versus large group framing sets up an institutional spectrum that can help program managers make decisions on what evidence to gather and how to allocate development resources when wading into an uncertain environment.

Three types of institutions

​Institutions are the ‘rules of the game’ that shape human behavior in conscious and unconscious ways. A common distinction is made between formal institutions (laws, regulations, contracts) and informal institutions (belief systems, social norms). We take that distinction a step further, and draw on the work of sociologist W. R. Scott, who proposed three types of institutions: regulative, normative and cultural cognitive. These flow from the more explicit and formal (regulative institutions) to the more implicit and taken-for granted (cultural cognitive). A helpful analogy is the iceberg model in systems thinking, which elaborates how mental models mold systemic structures that ultimately shape patterns of behavior and events.

The three institutional types each influence behavior in different ways, based on different logics, compliance mechanisms and sources of legitimacy. Regulative institutions explicitly coerce behavior through rules or sanctions enforced externally. Normative institutions encourage behavior by appealing to the need for people to belong by following desirable group norms. Normative institutions also sanction people for not following norms via social mechanisms like shame. Cultural cognitive institutions shape subconscious assumptions, constructing a taken-for-granted view of how the world works that shapes the available choices for action or behavior.

What is most important about this distinction is that the more deeply embedded the institution, the more dominant or controlling its influence on a market system’s behaviors. When all three sets of institutions align, behavior patterns can be deeply entrenched and very difficult to change. When there is conflict or different signals being sent, it is the normative and cultural cognitive institutions that tend to dominate. It is important to note that change can happen even when a behavior is deeply held, but it would likely take longer to change.

Implication for practitioners

Complexity was central in helping practitioners understand and embrace the messiness of systemic change. For example, in Zambia, a project decided that a lead farmer model was the right way to push the project’s ideas on improved farming practices. The project provided that farmer with resources and training that other farmers could not access. While complexity thinking might align with this tactic as a way to catalyze change as it could present an attractive alternative for other farmers, institutional theory clearly would have identified the local normative and cultural-cognitive institutions around communal loyalty that raise the potential for communal backlash. In the end, that farmer’s fields were burnt down by the community as they were perceived as behaving outside of acceptable boundaries as defined by local manifestations of institutions. Additionally, institutional theory helps practitioners better understand their own biases. In the Zambia case, it’s clear that the farmer model is based on long-held North American normative and cultural-cognitive institutions around individualism and individually-driven innovation that often does not translate in other country contexts. By combining complexity to understand the messiness of change, and institutional theory to understand localized and contextualized trade-offs, practitioners can make better and more informed decisions on how best to catalyze an internal change process.

Institutional theory also helps practitioners to understand change at deeper levels. Small group societies are very effective in certain ways that are positive, including deep and wide family/friends/communal networks that absorb shocks and stresses. At the same time, small group societies tend to create high levels of haves and have-nots with internal hierarchies. Similarly, larger group societies rely heavily on more formal mechanisms and innovation to neutralize/mitigate risks, but when those functions perform poorly, family/communal networks are often not strong enough to absorb shocks. This shows how important it is to think through change processes carefully, to avoid the unintended consequence of eroding existing (small-group) risk management mechanisms before new society-wide (large-group) mechanisms are fully developed.

For more on how to apply this framework in practice, see Part 2 of this blog.



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