When a tennis player decides if and when to use their rights to ‘video review’ of points they are trying to solve cognitive and tactical problems. When a cricket captain decides to review an umpire’s decision there’s an additional problem. Challenges have been rationed by design to prevent frivolous challenges. But the individual player with the best cognition – the batsman or bowler – has a strong interest in influencing the result. Indeed, so strong that it could even warp their cognition, let alone their judgement. So how should the captain make the decision? The captain has a governance problem.
To generalise, a governance problem exists where the ‘brain’ or decision making of some entity – a biological or social organism – must access information from within that organism to make a decision and there is no unproblematic way of generating and/or handling the information. These kinds of problems are ubiquitous. There are lots of governance problems to be dealt with in jellyfish and vastly more in mammals. I mean how the hell do you get a bunch of amino acids to assemble themselves into an functioning eye, leg or wing. Well it turns out we can do that.
And social formations are the same. Not only must information be effectively generated, handled and transmitted, but there is the further complication of people’s interests. Economics usually collapses these considerations into questions of interests. It sees the problems as ‘principal/agent’ problems and they’re solved – to the extent that they can be solved – by mechanism design – by rules – like the rule limiting each side’s appeals or ignoring outlying votes when judges vote on who did the best dive.
Very few worldly situations are fully ‘incentive compatible’. Indeed that’s usually true even for the more rarefied situations that turn up in formal models. Still there’s another string to our bow. We also lean heavily on the psychology and ethical intuitions that evolved with the evolution of our species. The fact is that we evolved as a closely cooperating species with a very strong sense of group solidarity.
So we play on that. Soldiers march, sportspeople train together and business and public sector agencies bond in a thousand ways – they go on retreats and discuss their organisations ‘vision’ and ‘mission’ and they may forget the mission and the vision on Monday morning, but they all feel more together (Well many of them do.) And our headmaster and the church and the St James Ethics centre all preach that we should do the Right Thing and on and on it goes. In any event, if we couldn’t get people to buy into the mission of their agencies, their families, their choirs, their firms, their football teams, their nations then we’d still pretty much be hanging from the trees. (OK we never hung from trees, but you get my drift.)
Now I’d argue that the whole story of development is actually the story of growing complexity. That seems like a reasonable description of the evolution of our universe which started off as something stranger than I can imagine, but spent a lot of the next few eons as mostly hydrogen. It’s true of the evolution of life – you know from jellyfish to mammals and thence to smart phone enabled humangoes. Harvard’s Ricardo Hausmann and César A. Hidalgo think that the story of economic development is the story of the evolution of economic complexity. But if development is the evolution of complexity, then, just as the jellyfish had a lot of work to do, a lot of jellyfish retreats to go on before it came up with a brain and eyes that could look around for threats and opportunities and make appropriate decisions, then one of the central tasks of development is expanding our mastery of the governance of complexity.
And the growth of complexity involves the mastery of detail – of finding out whether the captain really should challenge the LBW decision – or whether to do so would be a bad bet. Modularity is one means by which complexity is governed, wether we’re talking of inanimate matter (atoms, molecules) biology or social formations. So the jellyfish needs to develop a bunch of organs to handle different tasks which are handled by modules – stomachs, eyes, livers, kidneys, blood system etc. But all those tasks require coordination. Sometimes this can be done using simple (brainless) thermostat like systems. And sometimes one needs something more complex in handling the interactions than that – a brain for instance. But the brain is a ‘top down’ coordinator. It has its uses in mobilising large amounts of resources, but it will have trouble in handling the micro-detail. That needs to be delegated to sub-systems – the modules.
Adam Smith’s story of the growth of the market and the division of labour is a similar story – though it’s without any brain. He’s not silly enough to think that the system can do without a brain – the brain is the government and the laws and mores of the land – those things that permit co-ordinated action. But he’s a fan of the power of decentralised decision making.
This story of the governance of complexity is also a good way to tell the story of the evolution of modern government. Separation of powers between ‘modules’ or routines of government helped tame the evils of excess power. But governments have grown since the eighteenth century when they came up with these ideas. You can complain about big government, but the fact is that governments have become immensely more complex – mirroring the growing complexity of the market and society. Only a fanatic or ideologue would imagine it should be any other way. (This is not an argument for larger or smaller government than we have, though it is an argument for a much more complex, capable government than we had in the eighteenth century.) The ‘web of law’ weaved by governments is immensely complex with thousands of organisations each having to interact according to law. And there’s a very imperfect ‘brain’ at the top which gets involved when absolutely necessary, but even while people go on about the holy grail of ‘joined up government’ or ‘whole of government’ delivery of services the fact is that the central brain is a bit of a last resort. Certainly not much chop at the micro-detail.
Those who have been following my posts about regulation will see the relevance of this thinking in my mind to regulation. I’m arguing that the problem with regulation is that most of the high level stuff doesn’t cut it. That regulation involves finessing the micro-detail – just as running a car factory does – or a bank, or an eye or a liver or a circulatory system or pretty much any damn thing. In business the story of decentralisation is critical. Small businesses make decentralised decisions by definition and large businesses must consider how to decentralise decision making. Nineteenth century railroad companies had to figure out how to do it, and Toyota figured out how to do this better with making cars, and they’re still not very good at it with banking and the incentives are all skewed so it’s not where the best bankers’ headspace is at.
But one of the great corruptions of our ability to handle complexity is command and control – the appeal to the central brain. In politics when the British Parliament tried to curtail the King’s power and bring it more firmly within the web of law, there was carnage for 20 years between 1640 and 1660. Then just 40 years later things fell into place. A fair bit of the thinking had been done in the civil war between 1640-60 and some lessons were learned. A Parliament knew pretty much what it wanted – and lo and behold William of Orange had been good enough to marry Mary Stewart in Holland, so they could be imported. A way was found to overcome ‘command and control’, to push authority down to the next level and voila – Britain powered into the modern era. The new constitution was better – much better – at governing complexity.
Finally then, at least for this post, this gives us a useful way of thinking about an agenda for the future. It’s the root of my own dislike of populism. In lots of areas of both commerce and government we have lots of trouble getting away from the limitations of ‘top down’. The civil war example is instructive, because the answer to the limitations of top down management is not to simply throw the switch to decentralisation. Centralisation is a crucial routine, indeed a module, even if it’s a meta-module. One very often needs some capacity at the top to arbitrate between different interests or focuses in the organism. So simply flattening an organisation or making it more democratic may be like sticking eyes and a liver into a jellyfish. They won’t help because they’re not properly evolved as part of the whole. The transmission of power to the parliament in the Glorious Revolution of 1688 required a lot of things to fall into place. Together.
Rather we need to apply ourselves to thinking of the obstacles to greater delegation from the top, and we need to build the institutions to do so. So when I argue for independent fiscal policy advisor that’s because I know that handling it in the way we do dumbs it down. We need decisions on fiscal policy made in as informed a way as possible and an important way of doing so is building an institution which enriches the decision which is ultimately sanctioned by the democratic process. That’s what we do with monetary policy and it works a lot better. When the US Fed decided on new and stronger “quantitative easing” measures a few months back, Mitt Romney said it was a travesty. The fact that it had the support of all but one of the twelve major decision makers in the Fed Reserve System was of no significance. Mitt knew, along with Ron Paul and all the other Republican know-nothing fanatics. My point is that their penchant for ‘top down’ direction by a body that didn’t know illustrates poor governance of complexity – with the mistake being the classic mistake of ‘top down’ interference.
When, as Ken documented for us, Michael Harmer abuses the processes of our law to aid a political agenda, the electorate – the ultimate ‘top down’ authority and central brain in our political system – is ill equipped to consider its merits or otherwise. That’s why such matters are rightly delegated to courts – though behind courts also lies the institution of the legal profession, law societies etc. (It’s interesting to note here that making something more ‘democratic’ sounds like you’re decentralising it – but in this case we’re moving further up the hierarchy of decision making – to the top where domain knowledge is scarce. In this case institutions that we have already developed – which help decentralise decision making (though not without self-serving rent acquisition by lawyers) are being wound back. That’s a backward step in the evolution of complexity and our capacity to govern it.
Though I have little doubt that we’re continuing on our longer journey towards greater decentralisation and capacity to govern complexity.