Using new institutional economics to understand leadership

Robert Campbell
Apr 14, 2019 · 25 min read

My objective in what follows is to outline the potential gains from taking an economic approach to understanding leadership. More specifically, I suggest that the conceptual framework that characterizes the new institutional economics (NIE) provides an effective mechanism for cutting through some of the clutter that has accumulated around the plethora of approaches, both theoretical and methodological, to articulating the nature and purpose of leadership. A key component of my argument is the contention that the endless proliferation of perspectives, and the seeming inability to establish any sort of consensus around them, arises from the fact that many of these approaches are built on an ontological foundation that is inadequate to the task.

Pick up any standard textbook on leadership and you will very early on be presented with a statement such as the following: “Leadership is rather like a UFO or the Loch Ness monster — many people claim to have seen it and yet evidence for it remains illusory and elusive” (Roe 2014, 3). Or, as Keith Grint (2010, 1) observes: “Despite three thousand years of ponderings and over a century of academic research into leadership, we appear to be no nearer a consensus as to its basic meaning.” Joseph Raelin (2016, 131) summarizes the current state of affairs, inside and outside the academy, this way: “The concept and practice of leadership have been overused and oversold to such an extent that the meaning of leadership is no longer conceptually intact, while its practice has become minimally suspect.” Despite this remarkable level of uncertainty and growing skepticism over the very existence and precise nature of the phenomenon, academics do not appear to have any hesitation about continuing to study leadership, nor specifying what exactly constitutes a valid means of doing so. Reflecting the dominance of psychological research in the field, statistical analyses of data gathered through self-reporting attitude surveys have become the norm. Given the wide range of theoretical frameworks informing such research, not to mention the serious limitations of variable research grounded in a positivist framework (see Hunter, Bedell-Avers and Mumford 2007), this claim seems a curious conceit.

The sheer volume of alternative theories of leadership presents a daunting challenge to students, researchers, and practitioners alike. New theories are continually being developed, and old ones never appear to fully fade from the horizon (e.g., trait theories). Occasionally one theory or other garners an inexplicable level of adherence, leading some researchers to observe, for example, in the case of transformational leadership, that the theory has lived on well past its “use-by” date (Jackson and Parry 2011, 33). On this point, Mats Alvesson and Dan Kärreman (2016, 11) suggest that while transformational leadership theory has been an ideological success, satisfying our endless need for “heroes and saints,” it has at the same time been an intellectual failure. It owes its remarkable level of appeal, not to the insight it has provided, but rather to the regrettable formula: “ideology + tautology + ignorance = popular leadership idea.”

Many scholars have recognized the need to bring some clarity to the field and have embarked on efforts to summarize and categorize the essential elements of the range of existing approaches. One particularly interesting study in this regard is that of Morela Hernandez et al. (2011), who create a matrix of leadership theories based on where these theories place the locus and mechanism of leadership. In other words, they attempt to sort leadership theories based on where leadership originates (locus) and how it is exercised (mechanism). The five loci they identify are leader, context, followers, collectives, and dyads, while the four mechanisms are traits, behaviors, cognition, and affect. Some approaches fit neatly into the matrix, as they utilize a distinct pairing of locus and mechanism (e.g., trait theories). Others, however, appear to overlap several categories (e.g., complexity theories). Whether this ambiguity constitutes a strength or weakness in any given approach is an open question. The principal value in these sorts of meta-analyses resides in the effort to determine what the essential elements of a leadership theory are and what causal mechanisms they rely on.

Approaching the issue from a different perspective, Jeremy Meuser et al. (2016) use network analysis to explore patterns of leadership theory integration. They extract data from 293 articles published in ten top journals over a 14-year period, in which 49 distinct leadership theories are mentioned, and that included at least three of these theories in their investigations. They found that in most cases researchers employed a focal leadership theory and supplemented this with two or more supporting theories. Network analysis allowed the authors to identify the six most common focal theories: charismatic leadership, transformational leadership, strategic leadership, leadership and diversity, participative/shared leadership, and trait approaches (Meuser et al. 2016, 1383). Among their conclusions, the authors indicate that most of the 49 theories identified are “ripe for integration,” and that the path towards such integration is clear from the “theoretical neighborhoods” that the network analysis exposed. This latter term refers to clusters of theories that share a good deal of common ground and are often found being used in support of one another. Among their practical advice for researchers is the advocacy of parsimony in theory development and the use of exhaustive literature reviews to avoid unnecessary proliferation of alternative, and often redundant, approaches and nomenclature.

A handful of scholars are suggesting that a more productive path towards theory integration is to be found in approaching leadership at a more fundamental level. Rather than examining full-fledged theories, they are trying to establish what the basic elements of a leadership theory might be. In this regard, Warren Bennis (2007) stated that the ontological basis of leadership is a “tripod” of leader(s), follower(s), and the pursuit of a shared goal. Consequently, if we accept this tripod as given, then any leadership theory put forward should be able to describe the precise nature of these three elements and the causal relationship among them. Wilfred Drath et al. (2013) demonstrate that, while the tripod provides an effective means for capturing the focus of earlier, more traditional theories of leadership, it fails to provide an adequate means to support more recent developments, such as shared or distributed leadership, complexity theories, and relational approaches. What the authors suggest is a new three-part ontology of direction, alignment, and commitment (DAC). They draw on pragmatism to justify the precedence of outcomes over the processes by which they are produced, let alone identifying the specific individuals involved in doing so. The DAC ontology presumes that these outcomes will emerge out of a suite of collective beliefs and practices, the details of which are largely irrelevant. In their view, the evidence of leadership is to be found in the existence of the three outcomes.

In attempting to offer an alternative to leadership theories based largely on what he refers to as the Anglo-American cultural focus on the individual, Joseph Raelin (2016) advocates for an approach to leadership based on collaborative agency. Suggesting that his approach is both more pluralistic and dynamic, he constructs what can be described as a seven-part ontology, consisting of these activities: scanning, signaling, weaving, stabilizing, inviting, unleashing, and reflecting. Unlike the DAC ontology, Raelin expresses the elements of his framework in gerundial (-ing) form — as processes rather than products. Positioning leadership primarily as a practice, he prioritizes the intersubjective interaction among participants as the key mechanism (unit of analysis) of leadership. The seven activities that categorize this interaction reflect Raelin’s understanding of agency as “the realization of social choices within the confines of structure, including its tendency to reproduce itself” (2016, 135).

Consistent with these latter approaches, I contend that many of the problems associated with the unsettling lack of progress in leadership research arise out of the use of inappropriate, and often unrecognized and thus undeclared, ontological assumptions. However, in my view, the otherwise valiant efforts of Drath et al. and Raelin still fall short of the mark. At the most fundamental level, these approaches, like many extant leadership theories, start with the assumption that there is some distinct purpose or need for leadership, as distinct from management or quotidian human interaction. Is this a valid assumption? If so, do we genuinely understand what that purpose is?

In the next section I examine some of the attempts that have been made to explore leadership from the perspective of economics. I then review some of the major concepts constituting the new institutional economics, followed by an attempt to demonstrate how these notions might be used as an alternative means for understanding the nature and purpose of leadership.

Economic approaches

While the idea of using insights from economics to understand leadership is not new, it is a highly-underdeveloped area of research, receiving little attention in the mainstream leadership studies literature. One potential reason for this is the fact that the dominant paradigm in economic research is the development and testing of mathematical models. Another aspect of this neglect is related to the foundational assumptions of neoclassical economics. Individual actors are viewed as rational maximizers, pursuing their own best interests in a world of scarcity. Further, the ontological foundation of economic thinking is the market, which operates in such a way as to balance the competing interests of buyers and sellers. The key to market operations is the pricing mechanism based on supply and demand. Through this mechanism, the market reaches equilibrium without the need for external (e.g., regulatory) interference. Complexities such as the inner workings of organizations are dismissed as messy and irrelevant to economic analysis.

Almost 20 years ago in an article published in the prestigious American Economic Review, Benjamin Hermalin (1998, 1188) set out to explain “how a leader induces rational agents to follow her in situations when the leader has incentives to mislead them.” Chock-full of sophisticated mathematics, and laying a foundation for his analysis with statements like, “a worker’s utility is w - d(e), where w is his wage and d(x) is an increasing, convex, and thrice-differentiable function” (1998, 1191), the fine detail of the author’s approach might be outside the comfort zone of many leadership scholars. His findings, however, are not. Among other things, Hermalin suggests that

followers follow because they become convinced: (i) that the leader has superior information, and (ii) that the leader, despite incentives to the contrary, is not misleading them; that she is informing them honestly. This second task is achieved by the leader convincingly signaling her information either by sacrificing or by setting an example. (1998, 1199)

Hermalin begins his analysis by assuming not only that a leader is someone with followers, but that following is a voluntary activity, separate from any positional authority that may be presumed to reside in the leader. Consequently, the leader must find a way of inducing followers to perform. His findings suggest that the leader best accomplishes this not by sharing information (sacrificing), but rather by setting an example — expenditure of effort in pursuit of a common goal.

Mana Komai and Mark Stegeman (2010) build on Hermalin’s work by examining leadership under conditions of information asymmetry. A fundamental aspect of their analysis is the idea that the cost of being fully informed is too high for most individuals to bear, and that the act of leadership is associated with the selective sharing of information to certain individuals under specific circumstances. In their view, in the absence of formal authority structures or contracts, leaders and followers will emerge out of the workings of the internal market for information. Through this process, a practical form of organizational efficiency and equilibrium will be attained. In such an environment, collective ignorance prevents any follower from pursuing their own private interest, and the reluctance of leaders to act (share information) makes them more believable when they do so. Their model suggests that the most efficient organization is made up of “mediocre leaders” and “ignorant followers,” where “he who knows less works more, and he who leads least leads best” (Komai and Stegeman 2010, 36).

Both studies just discussed are based on several assumptions about the nature of leadership as well as about the nature of the organizations in which leadership takes place. They follow the conventional approach to economic analysis, which involves constructing a mathematical model and then testing that model, not against empirical evidence, but against the foundational assumptions of that model and of economics more generally.

John Kulas, Mana Komai and Philip Grossman (2013, 350) present the results of a series of laboratory experiments, carried out with economics and psychology students, designed to determine “how the distribution of risk within a collective can influence group direction, alignment, and commitment.” Part of their objective is to demonstrate the potential benefits to leadership research from using two complementary methods — one from psychology and one from economics. From psychology, they use data from self-reported attitude surveys filled out by the students to determine relative aversion to risk. This component is then included in the next research step to represent the influence of actual human behavior, which very often differs considerably from the rigid rationality assumption of economics. From economics, they use experimental data from a series of three-person collective action games, in which individuals are assigned a role (either leader or follower) and have different levels of access to information. Game theory, familiar to many through the classic case of the prisoners’ dilemma, has become a key tool (as with regression analysis) in the arsenal of economists exploring many areas of interest (see Dixit, Skeath and Reiley 2015). At its simplest, a game of strategy involves two players who must choose between two courses of action, for which they know the pay-off (cost/benefit), based on what they think the other player will do. Contrary to their expectations, and the predictions of a purely game-theoretic approach, the researchers found that the level of risk aversion did not influence the course of action selected by the participants. Notwithstanding these findings, the authors were more concerned to demonstrate that combining the two methodologies could provide richer results and identify many fruitful avenues for further research.

Of greater importance to the current discussion is that fact that Kulas and his colleagues adopt the DAC ontology developed by Drath et al., going so far as to suggest that this ontology be leveraged as a means for supporting further attempts at interdisciplinary leadership research. Their selection of this ontology, however, appears to be based less on an evaluation of the substance of the DAC scheme, than on the fact that it offers a workable alternative to the traditional leadership ontology as articulated by Bennis, as well as to at least some of the foundational assumptions of neoclassical economics. It seems that the authors chose an ontological framework that was consistent with their methodology. At the risk of overstating the case, things do not exist because we know how to study them, we learn how to study them because they exist. While accepting the limitations of a purely psychological approach to studying leadership, I would suggest that the adoption of an economic perspective need not be based in methodology. Rather, there might be more to gain from tapping into the conceptual arsenal of economics. The following section outlines one way in which this could be done.

New Institutional Economics

In contrast to the mainstream neoclassical approach to economics, which “black-boxed” institutions, treating their inner workings as irrelevant to economic analysis, institutional economics distinguished itself by positing that institutions matter. Initially associated with the work of John Commons, Wesley Mitchell, and Thorstein Veblen, the perspective gained little traction among researchers, in part because the core concept of institutions was inadequately defined. The expression “new institutional economics” was coined by Oliver Williamson (1975) to describe efforts to revitalize institutional economics by offering a more fulsome conceptualization of the nature and function of institutions. The key element of this new approach was best articulated by Douglass North (1990), who defined institutions as the “rules of the game,” with individuals and organizations viewed as the “players” of the game. North’s use of the concept of a game should not be confused with experimental games of strategy, as discussed above. Rather, North was using the expression somewhat metaphorically to capture “the humanly devised constraints that shape human interactions,” which “are formed to reduce uncertainty in human exchange” (1990, 3).

Beyond its emphasis on institutions, NIE broke with the neoclassical approach with respect to its views on the nature and motivation of the individual participant in the economy. “[I]nstead of being constructed through a process of rational choice and utility-maximization, society creates its own rationality by building a social order on the basis of the definition and reorganization of rights and rules” (Kozenkow 2013, 99). By adopting this more social constructionist perspective on the operation of the economy, NIE exposed some of the limitations of the mathematical modelling approach as a research paradigm. In this respect, it aligned itself with other heterodox approaches such as evolutionary economics, behavioral economics, and complexity economics, all of which are based on a more realistic view of human nature, characterized by attributes such as apathy, opportunism, and bounded rationality. In terms of how NIE is to be put into practice as a research agenda and a means of understanding the economy, the approach is generally identified with the exploration of three core areas: transaction costs, property rights, and contracts. As Kozenkow (2013, 93) explains: “The economics property rights emphasize ex ante institutional arrangements, transaction cost economics stress ex post governance while contract theory focuses on ex ante incentive alignment.” The following paragraphs describe these three concepts in more detail.

Paralleling its position regarding institutions, mainstream economics posited that the analysis of market operations could be carried out without regard to transaction costs, which are assumed to be equal to zero. Pushing this assumption to its logical conclusion, Ronald Coase (1937) set out to determine why firms exist at all. More specifically, he tried to determine under what conditions a business enterprise should perform some function internally, as opposed to contracting out (going to the market). The fact that large numbers of firms of varying structure, size, and complexity do exist implies that the market is inefficient, and that steps must be taken to manage the costs associated with compensating for this inefficiency. Sometimes referred to as the vertical integration problem, or simply the make-buy problem, Coase suggested that the management of transactions associated with contracting out is the key determinant of what goods and services are produced in an economy.

On a practical level: “a would-be trader must find someone with whom to trade, get information on price and quality, strike a bargain, draw up a contract, and monitor and enforce the contract” (Ménard and Shirley 2014, 544). These activities all have costs associated with them. In Coase’s view, firms can reduce these costs by carrying out these activities within the firm. The institutional arrangement or governance structure set up to manage these activities, however, is dependent of certain factors, such as asset specificity, frequency, and uncertainty (Williamson 1979). The notion of asset specificity deals with the extent to which a specific allocation of resources can, or cannot, be redeployed. For example, a firm may need to invest in expensive, single-purpose equipment, or it may need to employ individuals with specialized knowledge and skill sets, that cannot be easily repurposed. Frequency refers to the number of times similar transactions take place. It is easy to imagine the savings involved in handling similar type transactions that occur on a regular basis, in contrast to the greater costs that would be incurred with idiosyncratic, one-off events. The range of potential uncertainties confronting all social enterprise is legion. Whether due to factors like moral hazard or natural disaster, the continued success of any organization will depend on the extent to which resources have been acquired (costs have been incurred) to provide flexibility and reserve capacity.

In another foundational article, Coase (1960) explained that, while mainstream economics assumes that people trade in physical and virtual commodities, what people trade are rights. Individuals acquire the right to carry out a prescribed set of actions (e.g., use, transfer, exploitation) on some property or other. Further, these rights are protected by law, through a system of government supported institutions (e.g., police forces, courts). However, Armen Alchian (1965) pointed out that rights are more often enforced by less formal means, such as peer pressure, etiquette, and custom. As with the management of transaction costs, NIE scholars point out that there are several potential institutional arrangements that will emerge, as society attempts to determine how best to design, assign, monitor, and enforce property rights (North 1990). Regarding the management of common property, such as fisheries, Nobel Prize winner Elinor Ostrom found that

community groups will produce outcomes superior to state regulation or private ownership when the boundaries of the users and resources are clearly defined and the group monitoring and enforcing the rules are tightly-knit with strong social norms and procedures for making and enforcing rules. (Ménard and Shirley 2014, 545)

These are highly circumscribed conditions, which, among other things, provide an excellent illustration of what North was referring to with his notion of the “rules of the game.” However, as Thráinn Eggertsson (2013, 3) observes, “communities may value norms in themselves, even though they are inefficient in a narrow economic sense.” The fact that norms have the potential to both facilitate and interfere with the exercise of rights is important when applying these principles to understanding leadership.

Within the context of NIE, contracts (agreements between parties) have two primary characteristics. First, no contract is ever complete. As with the notion of uncertainty around transaction costs, eventualities may arise that could not have been foreseen by either party to a contract. Williamson (1996) drew attention to the fact that, given their inherent incompleteness, parties to a contract may be tempted to act opportunistically (defect) when stakes are high. Second, no contract can ever be totally enforced. As just discussed with respect to rights, there is no perfect mechanism for ensuring that both parties will fulfill the conditions set forth in a contract. North (1981) and others pursued this line of research, suggesting that the cost of enforcement is too high for any contractual party to incur, so control must be handed over to a third party (e.g., government), even though this action brings with it multiple risks; especially, the problem emphasized by Garrett Hardin (1968) in his ground-breaking article on the tragedy of the commons: quis custodiet ipsos custodes (who watches the watchers?).

One of the key issues in the study of contracts is the so-called principal-agent problem, as laid out by Michael Jensen and William Meckling (1976). The problem arises out of the fact that ownership and management of firms is most often performed by different parties. How do owners (shareholders) ensure that managers (e.g., CEOs) are acting in accordance with their goals? An employment contract may be set out, but the specification of potential eventualities and the task of effective monitoring are nearly impossible to achieve. Consequently, it has become common practice to attempt to buy loyalty (compliance) through, for example, various forms of executive compensation that may include high salaries, stock options, and performance bonuses. Not only do these efforts represent a significant transaction cost, their potential negative social impact has been highlighted through a growing number of high-profile cases of CEO misconduct (e.g., Wells Fargo). Advances in contract theory research led to Oliver Hart and Bengt Holmström being awarded the 2016 Nobel Prize in economics.

The three core areas of transaction costs, property rights, and contracts have become the focus of distinct research trajectories within NIE. However, when it comes to understanding the workings of an organization of any kind, they are inseparable. The level of formality and complexity may vary greatly across of the range of social relations from families, to corporations, to national governments, but the full range of activities that take place with respect to management in these settings can be described using these three categories. That is the fundamental ontological shift that provides the basis for viewing leadership through the lens of NIE.

Understanding leadership

I stated at the outset that a key component of my criticism of current efforts to understand the nature and purpose of leadership is linked to matters of ontology. Adopting the conceptual framework of the new institutional economics provides us with a means both to understand the origin of the problem as well as to outline a potential solution. In what follows, I first describe two ways in which the concept of leadership has been institutionalized — become normative. I then explain how, by abandoning both conceptions, the opportunity exists to develop a more substantial understanding of leadership in terms of transaction costs, property rights, and contracts. By substantial, I mean an understanding of leadership that will overcome current ambiguities and thereby be more useful to researchers and practitioners alike.

The first way in which leadership has become institutionalized is consistent with the tripod ontology outlined by Bennis. In this view, leadership is positional. There is a designated leader, and the causal arrow with respect to action emanates from that leader to a group of followers in pursuit of a common goal. Even when we allow for the identification of alternate loci, as demonstrated by Hernandez et al. (2011), the fundamental ontological principle does not change. The geography may be different, but the geometry has remained the same. Similarly, a focus on the products (outcomes) of leadership (Drath et al. 2013) or the processes through which they are achieved (Raelin 2016) simply shifts the way in which we prioritize the different elements of the same leadership diagram. A big part of the problem here arises from the failure to distinguish between the notions of leader and leadership. The confusion created through the conflation of these two linguistically, but not necessarily otherwise related, concepts continues to be an impediment to scholarship and practice.

Just because someone is identified as the leader does not mean that the person has leadership ability or that they will at any time during their tenure in such a position display leadership. Traditional concerns with authority, responsibility, or accountability are critical components of organizational structure and dynamics, but they should not be confused with the process of leadership. These matters have become institutionalized, and they are critical to the operation of any organization. However, they are more appropriately designated as management. In the language of NIE, these matters are governed by the rules of the game. Such rules are in place to handle situations that are highly predictable and for which procedures are well established, or can be reasonably adapted. Management is an ongoing process involving the construction, interpretation, selection, and application of rules. By contrast, leadership is a transient phenomenon that emerges in response to matters of immediate concern which cannot be handled within the existing rule set. We do not need a theory of leadership that deals with the notion of leader as positional. Nor should we conflate, or otherwise confuse, leadership with management. Rather, we need to drop the false equivalency of leader and leadership from our thinking.

The second way in which leadership has become institutionalized can best be described in terms of what James Meindl, Sanford Ehrlich, and Janet Dukerich (1985) refer to as the romance of leadership. Consistent with what Alvesson and Kärreman (2016) identified as our preoccupation with “heroes and saints,” this perspective reflects what social psychologists refer to as the fundamental attribution error. People have a tendency of attributing behavior to the inherent characteristics of an individual rather than to the external factors that may account for such behavior. Irrespective of the realm of human activity (e.g., business, community, politics), we want to identify a specific individual who got us into some situation or other, whether positive or negative. We then construct a persona for this individual so that we can explain what happened in terms of that person’s outstanding character strengths or flaws. In this respect, the romance also extends to “sociopaths and demons.” Ontologically, there is no difference between good and bad. Hitler and Gandhi can both be idolized, or vilified. Ethical evaluations, as important as they may be, stand outside this framework.

Another important aspect of the romance of leadership perspective is that it highlights how an ontological error has led to an epistemological black hole. As Hans Hansen, Arja Ropo, and Erika Sauer (2007, 544) express it, leadership has become “the great dumping ground for unexplained variance.” In other words, when all other avenues to explain the success or failure of an organization have failed, we invoke leadership. This approach amounts to an ontology of ignorance, suggesting that leadership stands outside our corpus of knowledge and is somehow impenetrable to our systems for acquiring knowledge. If this is in fact the case, then studying leadership is a vacuous exercise, and any hope of teaching or learning leadership is a fantasy.

Applying the insights of NIE, we can say that leadership has been incorrectly institutionalized as either position or mythos, neither of which constitute an appropriate ontological basis for understanding its nature and purpose. Leadership is not about the rules of the game; it is about what might take place when those rules prove inadequate. It is also about charting the best course through the multiple layers of often obscure and contradictory rules that constrain action, should the need arise. It is for the blips, the unpredictable, the unknowns, and it is transient. It is about coping in the here and now. Consequently, leadership cannot be institutionalized. We do not need an ontology of leadership. Rather, the nature of leadership is that it arises out of organizational dynamics founded on an ontology of transaction costs, property rights, and contracts.

Leadership is also characterized by a sense of urgency. It is a response to acute institutional failure. There is no time to develop new rules, communicate these to the parties involved, and make alterations to ways of working. The immediate nature of leadership not only reflects urgency, but also transience. If we think in terms of an act of leadership, it happens, and then it’s gone. In the aftermath, the organizational system and the individuals involved return to their prior state. To the extent that institutional inertia and adherence to norms can facilitate ongoing organizational operations, they can also serve to prevent or nullify acts of leadership. However, steps may be taken to incorporate lessons learned, and the consequences of whatever action took place may mean that business as usual cannot continue. These latter activities are not leadership. They are part of the continuous process of rule development and implementation that contributes to the sustainability of any organization. The person or persons involved in the act of leadership have not undergone a miraculous transformation. To now identify them as leaders, with the expectation that they will have the answer the next time one is needed, or that they are now somehow better equipped to potentially have such an answer, does a disservice to them and everyone else in the organization. We cannot predict when and where leadership will be required within an organization, nor can we predict what set of skills or unique insights will be required should the need arise.

The implications for leadership research and practice are significant. First, if we accept the transient nature of leadership, then the possibility of both studying and practicing leadership is called into question. Regarding research, the most productive path at the outset may be to focus on disentangling the notions of leader and leadership, and deconstructing the mythos around heroes and villains. Beyond this, developing a more substantial approach to leadership may involve examining those instances where institutional failure has led to novel solutions in terms of minimizing transaction costs, adjudicating property rights, and enforcing contracts. Further, examining cases in which solutions have not been forthcoming can provide insight into organizational dynamics, with the objective of learning what factors inhibit the emergence of leadership. Following such a trajectory would also contribute to a more nuanced understanding of management. In practice, organizations need to train personnel to view what takes place in terms of the rules regarding transaction costs, property rights, and contracts. A vocabulary of managers and management needs to replace that of leaders and leadership, and this needs to find expression in terms of the rules of the game.

Conclusions

In this article, I have attempted to demonstrate the potential value of adopting an economic approach to the study of leadership. I have focused on aspects of the new institutional economics to suggest some alternative conceptual tools to inform both our thinking and research regarding leadership. Understanding institutions as the rules of the game helps us to identify and correct problems with the dominant ontologies informing leadership research. Conceiving of what takes place in organizations in terms of transaction costs, property rights, and contracts helps us to identify the nature and purpose of leadership. I have not offered a new definition of leadership, nor have I offered a new theory of leadership. Rather, I have proposed a means through which we can cut through the accumulated clutter surrounding leadership research and practice, with the goal of providing the framework for a fresh start.

Viewing leadership as a transient and emergent phenomenon means that it needs no ontology of its own, Rather, an organizational ontology expressed in terms of transaction costs, property rights, and contracts provides the essential basis for leadership to emerge. We can jettison the preoccupation with the dominant dichotomy of leader and followers, and we can stop devising elaborate alternatives in terms of processes and products. In their place, we can start trying to understand what conditions are necessary and sufficient for leadership to emerge.

I may be accused of playing word games, merely substituting management for leadership. That is not the case. I am not denying that leadership takes place. What I am saying is that too much of what we now identify as leadership is more appropriately viewed as management, a perspective articulated many years ago by John Kotter (1990). Further, correctly differentiating between these two phenomena will help us to acquire a better understanding of both, not only leading to more consequential research, but also leading to improvements in the way we select and train managers.

References

Alchian, A.A. (1965). Some economics of property rights. Il Politico 30, 4, 816–819.

Alvesson, M. & Kärreman, D. (2016) Intellectual failure and ideological success in organization studies: The case of transformational leadership.” Journal of Management Inquiry 25, 2, 139–152.

Bennis, W.G. (2007). The challenges of leadership in the modern world. An introduction to the special issue. American Psychologist 62, 1, 2–5.

Coase, R. (1937). The nature of the firm. Economica 4, 386–405.

Coase, R. (1960). The problem of social cost. Journal of Law and Economics 3, 1–44.

Dixit, A., Skeath, S., & Reiley, D. (2015). Games of Strategy, 4th ed. New York: WW Norton.

Drath, W.H., McCauley, C.D., Palus, C.J., Van Velsor, E., O’Connor, P.M.G., & McGuire, J.B. (2013). Direction, alignment, commitment: Toward a more integrative ontology of leadership. The Leadership Quarterly 19, 635–653.

Eggertsson, T. (2013). Quick guide to new institutional economics. Journal of Comparative Economics 41, 1–5.

Grint, K. (2010). Leadership: A Very Short Introduction. Oxford: Oxford University Press.

Hansen, H., Ropo, A., & Sauer, E. (2007) Aesthetic leadership. The Leadership Quarterly 18, 544–560.

Hardin, G. (1968). The tragedy of the commons. Science 162, 3859, 1243–1248.

Hermalin, B.E. (1998). Toward an economic theory of leadership: Leading by example. American Economic Review 88, 5, 1188–1206.

Hernandez, M., Eberly, M.B., Avolio, B.J., & Johnson, M.D. (2011). The loci and mechanisms of leadership: Exploring a more comprehensive view of leadership theory. The Leadership Quarterly 22, 1165–1185.

Hunter, S.T., Bedell-Avers, K.E., & Mumford, M.D. (2007). The typical leadership study: Assumptions, implications, and potential remedies. The Leadership Quarterly 18, 5, 435–446.

Jackson, B., & Parry, K. (2011). A Very Short, Fairly Interesting and Relatively Cheap Book about Studying Leadership, 2nd ed. Thousand Oaks: Sage.

Jensen, M.C. & Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3, 4, 305–360.

Komai, M., & Stegeman, M. (2010). Leadership based on asymmetric information. RAND Journal of Economics 41, 1, 35–63.

Kotter, J. (1990). What leaders really do. Harvard Business Review 68, 3, 103–111.

Kozenkow, J. (2013) New institutional economics: Foundations and latest trends. Society and Economy 35, 1, 87–101.

Kulas, J.T., Komai, M., & Grossman, P.J. (2013). Leadership, information, and risk attitude: A game theoretic approach. The Leadership Quarterly 24, 349–362.

Meindl, J.R., Ehrlich, S.B., & Dukerich, J.M. (1985). The romance of leadership. Administrative Science Quarterly 30, 1, 78–102.

Ménard, C., & Shirley, M.M. (2014). The future of new institutional economics: From early intuitions to a new paradigm? Journal of Institutional Economics 10, 4, 541–565.

Meuser, J.D., Gardner, W.L., Dinh, J.E., Hu, J., Liden, R.C., & Lord, R.G. (2016). A network analysis of leadership theory: The infancy of integration. Journal of Management 42, 5, 1374–1403.

North, D.C. (1981). Structure and Change in Economic History. Cambridge: Cambridge University Press.

North, D.C. (1990). Institutions, Institutional Change and Economic Development. Cambridge: Cambridge University Press.

Raelin, J.A. (2016). Imagine there are no leaders: Reframing leadership as collaborative agency. Leadership 12, 2, 131–158.

Roe, K. (2014). Leadership: Practice and Perspectives. Oxford: Oxford University Press.

Williamson, O.E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications. New York: Free Press.

Williamson, O.E. (1979). Transaction cost economics: The governance of contractual relations. The Journal of Law and Economics 22, 2, 233–261.

Williamson, O.E. (1996). The Mechanisms of Governance. Oxford: Oxford University Press.

Zehnder, C., Herz, H., & Bonardi, J.P. (2017). A productive clash of cultures: Injecting economics into leadership research. The Leadership Quarterly 28, 1, 65–85.

Robert Campbell

Written by

sociologist teaching in the MBA program in community economic development at Cape Breton University

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade