Living within Rules: Why Only Limited Governments Can Be

Resilient, and Only Polycentric Governments Can Be Limited

Vlad TarkoGeorge Mason University, Economics Department

Basic idea

• The institutions of a resilient social system:– Flexible enough to deal with new

challenges– Fixed enough to create the basis for

credible commitments

• Flexible institutions arbitrary use of power

• Flexibility without arbitrary power: polycentricity

Overview

• What is institutional resilience?• What is institutional complexity?• The nested nature of social order• Institutional design: incentive and

knowledge problems• Polycentricity

Overview

• What is institutional resilience?• What is institutional complexity?• The nested nature of social order• Institutional design: incentive and

knowledge problems• Polycentricity

Institutional resilience

• The ability of a social system (society, community, organization) to react and adapt to abrupt challenges (internal or external) and to avoid gradually drifting along destructive slippery slopes.

Resilience from an equilibrium perspective

• Absorption capacity– The size of the shock with which the

system can cope

• Speed of recovery–How fast the system gets back to

normal after a shock

Resilience from a non-equilibrium perspective

• Adaptability– Change is • unavoidable• necessary

–Uncertainty as a resource

• Avoiding slippery slopes towards “catastrophic thresholds”– E.g.• Mancur Olson’s Rise and Decline of Nations• Jared Diamond’s Collapse

Overview

• What is institutional resilience?• What is institutional complexity?• The nested nature of social order• Institutional design: incentive and

knowledge problems• Polycentricity

Complexity is non-linear

• Miller & Page (2007) Complex Adaptive Systems: An Introduction to Computational Models of Social Life: – “Complexity arises when the dependencies

among the elements become important. In such a system, removing one such element destroys system behavior to an extent that goes well beyond what is embodied by the particular element that is removed.”

What is social complexity

• The network that matters is not made of actual, flesh-and-blood people

• What matters: the network of institutions

• Eliminating individual people rarely matters for the social system as a whole

• Missing institutions matter

The fundamental building block of institutional reality

• Searle’s role assignment formula

x has institutional role R in context C

• Institutional role (position, “status function”) = bundle of rights and obligations

• How institutional complexity emerges: – x and C can be previously defined roles or

functions of previously defined roles

Rules and norms

• Universalized roles– Tomasello (2009) Why We Cooperate: • “social practices in which ‘we’ act together

interdependently in interchangeable roles toward a joint goal generate, over time, mutual expectations leading to generalized, agent-neutral normative judgments”

• Rules from roles:– For all , x has role R in context C

Political power

• Not all institutional roles are generalized into rules– An institutional role augments one’s

authority– Rules with exceptions: possibility for

arbitrary use of power

• Few, if any, rules are universal:– Rules from roles: • For all , x has role R in context C

– is some minority

Overview

• What is institutional resilience?• What is institutional complexity?• The nested nature of social order• Institutional design: incentive and

knowledge problems• Polycentricity

Self-similarity

• The same functional pattern is repeated at different scales.

• Ostrom’s Institutional Analysis and Development (IAD) framework is such a universal functional pattern in the social realm.

IAD, step 1

IAD, step 2

IAD, step 3

IAD, step 4

Institutional design: Incentive and knowledge problems

• IAD framework is mainly a descriptive scheme – useful for understanding how institutional change occurs (Ostorm 2008).

• The redesign is done by the participants themselves– who often have vested interests about the

outcomes.

• The redesign of the institutional factors is not done by – impartial and benevolent agents– omniscient agents

Overview

• What is institutional resilience?• What is institutional complexity?• The nested nature of social order• Institutional design: incentive

and knowledge problems• Polycentricity

Knowledge problemInstitutional design

What drives social complexity up?

• Ideally, institutions as devices for preventing social problems– “if people can rely on others to fulfill certain roles,

then their expectations are more likely to be coordinated”; “institutions convey knowledge, in the sense that the routine courses of action they embody are efficient adaptations to the environment” (O’Driscoll & Rizz0 1985, The Economics of Time and Ignorance)

– “Complex societies are problem-solving organizations, in which more parts, different kinds of parts, more social differentiation, more inequality, and more kinds of centralization and control emerge as circumstances require” (Tainter 1988, The Collapse of Complex Societies)

Trade-off between efficiency and resilience

• Miller & Page (2007):– “Adaptive systems have to deal with the

tension between the benefits of achieving precise behavior and the cost of increased system fragility”

• Optimal systems are less robust, Carlson & Doyle (1999), Highly Optimized Tolerance (HOT):– “Optimizing yield will cause the design to

concentrate protective resources where the risk of failures are high, and to allow for the possibility of large rare events elsewhere”

Why do complex social systems fail?

• Constanza, Low, Ostrom & Wilson (2001) Institutions, Ecosystems, and Sustainability– Missing or failed institutions– Scale mismatches

• Missing Connections• Incorrect Scale of Information

• Rational social design is very hard. • Alternative: a social mechanism for growing

institutions “organically”, by trial and error.

Incentive problemInstitutional design

Rules designed to benefit designers

• Rent-seeking• Regulatory capture• Credible commitment problem• Endurance of constitutions– Easier to amend • Lasts longer• Less constraining

–Harder to amend• It is replaced entirely –> even less credible

Overview

• What is institutional resilience?• What is institutional complexity?• The nested nature of social order• Institutional design: incentive and

knowledge problems• Polycentricity

What is polycentricity

• Aligica & Tarko (2012)– a multiplicity of decision centers acting

independently but under the constraints of – an over-arching set of norms and rules

which create the conditions for – an emergent outcome to occur via a bottom-

up evolutionary (competitive) process

• Ostrom (2005)– The decision centers can be at different

scales (e.g. federalism)

Effects of polycentricity: knowledge problem

• Experimentation & imitation– Trial and error– Rejection of “one size fits all” and

“blueprint thinking”– Cultural evolution of institutions

• When failures occur:– Large scale -> reliance on local

governance– Small scale -> help from higher level

organization

Effects of polycentricity: Incentive problem

• Subsidiarity: – all problems must be addressed at the

most local level possible – that avoids free-riding problems

– Free exit gets cheaper => increased pressure on local authorities => less abuse of arbitrary power

• Universal rights recognized and enforced at larger scale:– Prevention of “local tyrannies”

Resilience and efficiency

• Resilience stems from limiting abuses of power (i.e. limited government)– Replacing highly personalized institutional

roles with general institutional rules– Polycentricity – especially free exit – forces the

adoption of rules

• Making rules efficient and flexible:– Institutional diversity and competition instead

of flexibility by unlimited authority– Polycentricity – experimentation & imitation –

facilitates the discovery of good rules and adaptability to new conditions

Rational rent-seeking VS free-floating rationales

• Persons with authority can’t really solve the knowledge problem– The world is too complex to be managed rationally– Only hope: relying on “wisdom without reflection”

(Burke), “organic institutions” (Menger), “free-floating rationales” (Dennett).

• Free-floating rationales serve no one person or group in a predictable fashion => tension with individual and group interests and their desire to design the institutions that best serve them.

• The system is resilient only to the extent that free-floating rationales win over special interests’ attempts at rational design.

• This happens only in polycentric systems.