Can a country prosper when its institutions fail?

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Can a country prosper when its institutions fail?

IN economics, we are taught to focus on what can be easily measured: Sales, profits, prices, tax revenues, etc. Since the decay and failure of instit

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IN economics, we are taught to focus on what can be easily measured: Sales, profits, prices, tax revenues, etc. Since the decay and failure of institutions isn’t easily quantified, this decay doesn’t register in the realm of economics. Since it isn’t measured, it doesn’t exist.

But institutional decay and failure is all too real, and it begs the question: How can a society and economy thrive when its core institutions fail? The short answer is they cannot thrive, as institutions are the foundations of the social and economic orders.

Our conventional view has a naive faith that “great leaders” can, somehow, reverse institutional rot. This faith overlooks the systemic sources of institutional decay and failure which leaders are constrained by the nature of centralised organisations and the incentive structure that slowly shifts from rewarding efforts to further the institution’s core mission to self-service and protecting a rigid, failing institution from outside scrutiny and reform.

As Samo Burja explains in his insightful essay, Why Civilisations Collapse, those inside institutions are by design so compartmentalised that few (if any) even recognise the institution is failing. As long as everything is glued together in each little compartment, no one grasps the entire institution has lost its way. And since no one recognises it, no one attempts to save it.

Institutions end up advancing caretaker managers who excel at the political game of rising to the top of a sprawling institution. When the decay (or budget cuts) finally triggers a crisis, the institution has been stripped of visionaries with a bold grasp of what’s needed to restore the focus on the core mission and institute new incentives. The bold leaders quit in disgust or were sent away as potential threats to the status quo.

The problem is institutions fail by the very nature of their centralised design. The organisation is centralised so directives flow down the chain of command, and every branch is compartmentalised to limit the power of each department and employee to disrupt the orderly flow of top-down directives.

Within this compartmentalised, top-down structure, the incentives are to follow procedures rather than get results. The rewards go to those who dutifully follow procedures rather than to those who raise the alarm about the loss of transparency, effectiveness and focus on fulfilling the mission.

The path of least resistance is to protect the existing structure and add more compartments, i.e. “new mission creep.” Rather than focus on the dissipation of resources and the decline of the core mission, leaders add “feel good” missions and PR promotions of phony reforms and initiatives that bleed more resources from the core mission.

Consider the institution of democracy, which has been corrupted into an invitation-only auction of state favours and rentier skims.

Democracies have another fatal flaw: Politicians win re-election by promising virtually everyone something for nothing: More benefits and entitlements and higher taxes. The gap between higher costs and declining revenues will be filled by government borrowing.

All this additional borrowing will supposedly be paid by the magic of “growth”, which will expand tax revenues at a rate that exceeds the cost of borrowing.

The progression of centralised power slowly but surely replaces the self-organising, resilient, decentralised structures of civil society with tightly bound hierarchical centralised structures that are increasingly ineffective, increasingly costly and increasingly fragile, i.e. increasingly prone to failure or collapse.

The irony of institutional decay and failure is everyone inside is so busy following procedures that nobody notices the decay until the whole worm-eaten structure collapses. Look no farther than financialised house bubbles, healthcare, corruption and education for examples of institutions in run-to-failure decline.

We are in effect so busy arranging the beach umbrellas per our instructions that we don’t notice the approaching tsunami. Can a country prosper when its institutions decay and collapse? Only in the fantasies and magical thinking of the delusional.