The (continuing) institutional revolution

I just read a fascinating book by Douglas W. Allen, The Institutional Revolution, which attempts to explain England’s transition from its apparently illogical early-modern institutions — aristocracy, purchased army commissions, lighthouses, private roads, even dueling — to modern institutions. And today, we see many of those institutions challenged.

Allen, an economist, argues that in a period when nature — weather, mostly — had a controlling influence on the work of state, and before authorities had reliable measurements — synchronized clocks, the ability to navigate to longitude, standard units of length — there was no way for the crown to measure the performance of its agents, to “distinguish between shirking and sloth, on the one hand, and chance, on the other.” So they proved their trust through investing what he calls hostage capital: building large estates, sending daughters to the court, buying army commissions in hopes of earning spoils of war. New means of measurement, he argues, opened the door to more sensible and effective management structures. “[P]rogress,” he says, “has been often little more than the removal of randomness in outcomes.”

I’m fascinated with Allen’s examination of society’s institutions — as organizations and as sets of rules — as they adapt to or are made extinct by new technologies. He points out that the transition to modern democratic institutions and bureaucracies was slow and syncopated. “As a result,” he writes, “throughout the Institutional Revolution numerous circumstances would have existed where the old institutional apparatus was inappropriate for the new order of things. This mismatch would have acted as a brake on economic growth…. [T]echnical innovations by themselves created institutional problems at the same time they solved engineering ones. Because the institutions took time to adjust, the full benefits of the technical changes took a long time to be felt.”

Sound familiar? Allen does not attempt to extrapolate to today — and perhaps I should not. But he does suggest that “an institutional reexamination of the Industrial Revolution” could “help modern economists in their policy recommendations on matter of current economic growth and development.” (Or a lack thereof.)

I wonder how inadequate — or doomed — our institutions are today in the face of new and disruptive technologies, including — to echo Allen — profound new means of measuring behavior (which upends, for example, advertising, not to mention tracking government performance through its data). It’s that kind of question that gets me in the most trouble with people I’ll call institutionalists, who defend legacy institutions — journalism, media gatekeepers, the academy, government, et al — against the disruption I sometimes welcome. See, for example, Andrew Keen. But I’m not killing these institutions, merely asking uncomfortable questions about the continued viability — without, of course, any answer to the question: What will follow them?

* Is the institution of journalism adequate to our new needs and knowledge?
* Was copyright as an institution made obsolete when copying cost nothing?
* Are modern politics incurably corrupted by money? (To answer that question, listen to this episode of This American Life.)
* Are our schools designed to turn out managers in the industrial age — human widgets made to make widgets, all the same — instead of the innovators we need, who are more likely to succeed?
* Is the firm — or at least part of its raison d’être — outmoded by the ecosystem?
* What is to become of the untrusted bank? Surely it cannot survive as an oxymoron.
* Can our capital markets still reward only growth when technology produces efficiency instead?
* Haven’t our health-care institutions foundered completely attempting to deal with the cost of their success: greater longevity and thus more ailments to treat?
* What becomes of our notion of nations when we can find, form, and act as publics around their borders?
* Whither capitalism?

Allen sheds no light on what could come next, nor could he or anyone. Instead, he offers a means of analysis. “[I]n the Darwinian struggle between nations, firms, and individuals,” he writes, “societies are driven to find institutions that get the job done under the circumstances faced at the time.” The issue for society is not affection or disdain for an institution and its traditions but the task at hand. Wishful thinking will not preserve the power of unnecessary old institutions nor make new ones. “Institutions are arrived at in many ways, often by accident or by trial and error.”

And so we have begun the process of negotiating new norms and building new institutions, while seeing whether incumbents can adapt. In the face of social services and the means to speak and share and connect anyone to anyone anywhere anytime, we are trying out new norms of privacy and publicness, etiquette and rudeness. Governments sense the threat of the internet and try to control it — under the guises of piracy, privacy, decency, security, civility — and contrary forces use the net to challenge their power. Journalism, publishing, and education face new, more efficient competitors. #OccupyWallStreet demarcated battle lines between the 1% — the modern aristocracy — and the 99%. As the aristocrat’s of Allen’s early modern period traded in social capital, so do we today, though we constantly recalculate its source and worth. Just as early modern roads were first maintained and run privately, so today are our early digital roads privately owned, and we are negotiating whether that is best for society. (At the start of the 19th century, Allen says, commerce and civic services “demanded that the roads ‘accomodate the traffic, rather than the traffic accomodate the roads.'” That is our battle today, eh?) Prior to the Institutional Revolution, labor was a matter of master and servant; will the current relationship of company and employee continue? And on and on.

In his conclusion, Allen writes:

Life is filled with examples of institutions that get the job done. Look around. Grand and broad systems such as ‘the rule of law’ and written constitutions exist, as do firms, churches, tribes, universities, societies and clubs, aid agencies, professional associations, unions, consumer’s groups, political parties, condominiums, cooperatives, and so on. But many more informal examples abound of social systems that can be just as binding and often more interesting: families, friendships, social networks, peer pressures, customs, social norms, mores and religious values, and the like. All of these social factors — these collections of economic property rights that affect an individual’s scope and ability of decision making — work together to make people behave a certain way: it is hoped in order to create a community that is prosperous, regenerating, and competitive. Not all societies are successful at achieving this end and often institutions are chosen that fail to meet the regularity of behavior that is desired. Stagnation is common for a period of time, but in the competitive environment of institutions, successful one often win out.

That is why I celebrate the competition.

  • excellent book …

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  • Joe

    Interesting ideas. I have been trying to think about what will happen to governments when the information flow continues to get faster than they can handle. Seems to me that one of the last big jumps in information speed was the telegraph and radio about 100 years ago and governments moved to centralized power and dictatorships leading to 2 world wars. Hopefully this one will be a little more peaceful!

    Thanks for all the TWIGs

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  • RedScot

    Excellent summary yet it ends with a declamation on the merits of competition. Whither mutualism, whither cooperation?
    Competition means wars, cooperation means peace.
    No matter which new institutional developments ‘evolve’ (and i think the appeal to Darwin perhaps disguises a social darwinian dynamic and we all know where that leads), if they do not trend to, and become cooperative institutions then progress will not continue without great poverty, distress and violence being the true cost. And, I am not sure we could even call that progress in the real sense of the betterment of humankind and of our somewhat precious planet.

    • Matthew James Goodwin

      Darwin didn’t only examine the inheritance of characteristics and their propagation by competitive selection but also cooperative and sexual selection.

      It was some elements in the political economy of the late 19th and early 20th centuries who promoted the view that it was competition that drove things.

  • I can’t wait to read this book!

    Jeff, i am curious if you have read “Why Nations Fail”? Both books appear to deal with similar issues around institutions.

    • @Jeff Jarvis – Fascinating topic with a stellar thesis concept, positing that ‘progress [is a function of the] removal of randomness in outcomes.’ Can’t wait to read this one. Enjoyed your “uncomfortable questions” (will re-post at least two particularly quotable ones) but was flummoxed by the seeming self-contradictory logic in the following line (perhaps Jeff will shed some light on his meaning): “Was copyright as an institution made obsolete when copying cost nothing?” If I understand you correctly, that would be like saying, ‘Well, since all the locks on our warehouse doors have rusted and fallen off, it’s much easier for burglars to steal our inventory. So why not just leave the doors open and fire the security guard?’ To be fair, I believe you are questioning whether the purpose of legal safeguards which protect intellectual property rights remains valid, given the divergence of data from physical media. An important and apropos question indeed. I would say yes, emphatically yes. Regardless of the fact that these laws had their inception prior to the digital age, the core value of their collective intent is Ownership of Private Property, a fundamental concept that is the cornerstone of a free society. Just because information is now easy to replicate & free to syndicate, does not diminish it’s value to the consumer(s) thereof, nor should it compromise it’s worth to it’s producer(s). In fact, I would argue quite the opposite! Rather than making such guidelines obsolete, the internet has created a data-flow scenario wherein Copyright law & DRM protection have more of a critical role to play than ever before. Your ruminations in response would be most welcome Mr. Jarvis!

      • Matthew James Goodwin

        Pay me for this then.

  • Dave

    This comment is in response to your question about whether the firm is an outmoded concept.

    Another great read is the End Of The Nation-State, Ohmae, 1996, ISBN-10: 0684825287. Ohmae argues that every economic era, from agrarian to industrial to information, is characterized by new forms of governance, trade, and societal norms. The emerging form factor for the information age, the nation-state, may be illustrated by cartels. In Central and South America, the drug cartels are the most efficient, albeit brutal, means for managing performance.

    Our challenge cannot be managing performance alone. If that is our goal, then the cartels are our destiny. Neither is it to maintain journalism, copyright, nor any of the artifacts of the industrial age for their sake alone. The goal is to evolve and to thrive in a complex environment where everything around us is inherently unpredictable and all institutions are unreliable. And that’s messy business.

  • It is amazing review this book. so want to read it directly. where to buy?

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