The neoliberal narrative of governance overlaps somewhat with rational choice theory. Both of them draw on microeconomic analysis, with its attempt to unpack social life in terms of individual actions and to explain individual actions in terms of rationality, and especially profit or utility maximization. Yet, although neoliberals deployed such analysis to promote marketization and the new public management, rational choice theorists were often more interested in exploring cases where institutions or norms were honoured even in the absence of a higher authority to enforce them.

Rational choice theory attempts to explain all social phenomena by reference to the micro level of rational individual activity. It unpacks social facts, institutions, and patterns of rule entirely by analyses of individuals acting. It models individuals acting on the assumption that they adopt the course of action most in accord with their preferences. Sometimes rational choice theorists require preferences to be rational; preferences are assumed to be complete and transitive. Sometimes they also make other assumptions, most notably that actors have complete information about what will occur following their choosing any course of action. At other times, however, rational choice theorists try to relax these unrealistic assumptions by developing concepts of bounded rationality. They then attempt to model human behaviour in circumstances where people lack relevant information.

The dominance of the micro level in rational choice theory raises issues about the origins, persistence, and effects of the social norms, laws, and institutions by which people are governed. One issue is the abstract one of how to explain the rise and stability of a pattern of rule in the absence of any higher authority. Rational choice theorists generally conclude that the absence of any effective higher authority means that such institutions have to be conceived as self-enforcing. Another issue is a more specific interest in the effects of norms, laws, and institutions on individuals’ actions. Rational choice theorists argue that institutions structure people’s strategic interactions with one another; stable institutions influence individuals’ actions by giving them reasonable expectations about the outcome of the varied courses of action from which they might choose. Another, more specific issue is in models of weakly institutionalized environments in which the absence of a higher authority leads people to break agreements and so create instability. Examples of such weak institutions include the international system and nation-states in which the rule of law is weak. Rational choice theorists explore self-enforcing agreements, the costs associated with them, and the circumstances in which they break down.

The new institutionalism

An institutional approach dominated the study of the state, government, public administration, and politics until about the 1940s. Scholars focused on formal rules, procedures, and organizations, including constitutions, electoral systems, and political parties. Although they sometimes emphasized the formal rules that governed such institutions, they also paid attention to the behaviour of actors within them. This institutional approach was challenged in the latter half of the 20th century by a series of attempts to craft universal theories: behaviourists, rational choice theorists, and others attempted to explain social action with relatively little reference to specific institutional settings. The new institutionalism is often seen as a restatement of the elder institutional approach in response to these alternatives. The new institutionalists retain a focus on rules, procedures, and organizations: institutions are composed of two or more people, they serve some kind of social purpose, and they exist over time in a way that transcends the intentions and actions of specific individuals. But the new institutionalists adopt a broader concept of institution that includes norms, habits, and cultural customs alongside formal rules, procedures, and organizations.

It has become common to distinguish various species of new institutionalism. Rational choice institutionalists examine how institutions shape the behaviour of rational actors by creating expectations about the likely consequences of given courses of action. Such institutionalism remains firmly rooted in the type of microanalysis just discussed. Other new institutionalists eschew deductive models in which outcomes are explained by reference to rational actions. These institutionalists typically explain outcomes by comparing and contrasting institutional patterns. They offer two main accounts of how institutions shape behaviour. Historical institutionalists tend to use metaphors such as path dependency and to emphasize the importance of macro-level studies of institutions over time. Sociological institutionalists tend to argue that cognitive and symbolic schemes give people identities and roles.

Historical institutionalists focus on the way past institutional arrangements shape responses to political pressures. They argue that past outcomes, having become embedded in national institutions, prompt social groups to organize along particular lines and thereby lock states into paths of development. Hence, they concentrate on comparative studies of welfare and administrative reform across states in which the variety of such reforms is explicable by path dependency.

Sociological institutionalists focus on values, identities, and the ways in which these shape actors’ perceptions of their interests. They argue that informal sets of ideas and values constitute policy paradigms that shape the ways in which organizations think about issues and conceive of political pressures. Hence, they adopt a more constructivist approach that resembles the interpretive theories of governance (see below). They concentrate on studies of the ways in which norms and values shape what are often competing policy agendas of welfare and administrative reform.

Systems theory

Although sociological institutionalism can resemble interpretive theories, it often exhibits a distinctive debt to organizational theory. At times its exponents conceive of cognitive and symbolic schemes not as intersubjective understandings but as properties of organizations. Instead of reducing such schemes to the relevant actors, they conceive of them as a kind of system based on its own logic. In doing so, they echo themes that are developed more fully in systems theory. A system is the pattern of order that arises from the regular interactions of a series of interdependent elements. Systems theorists suggest that such patterns of order arise from the functional relations between, and interactions of, the elements. These relations and interactions involve a transfer of information. This transfer of information leads to the self-production and self-organization of the system even in the absence of any centre of control.

This conception of governance highlights the limits to governing by the state. It implies that there is no single sovereign authority. Instead, there is a self-organizing system composed of interdependent actors and institutions. Systems theorists often distinguish here between governing, which is goal-directed interventions, and governance, which is the total effect of governing interventions and interactions. In this view, governance is a self-organizing system that emerges from the activities and exchanges of actors and institutions. Again, the new governance arose out of the belief that society has become centreless, or at least endowed with multiple centres. From this perspective, order arises from the interactions of multiple centres or organizations. The role of the state is not to create order but to facilitate sociopolitical interactions, to encourage varied arrangements for coping with problems, and to distribute services among numerous organizations.