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Policy Brief : A Long View of Institutional Choices in Crisis

Jenna Bednar and Scott E. Page

March 2020

In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.

-Theodore Roosevelt [1]

 

We are at a moment when governments must make choices with life-and-death consequences.  State and national governments have imposed quarantines.  The US Congress passed legislation approving cash payments to individuals and loans and bailouts to businesses and industry.  Government takeover of some functions that had been private appears imminent.  These choices have unprecedented scale and scope.  Decisions and allocations that had been made democratically, or in markets, or by communities, now reside in the portfolio of bureaucrats.

These shifts from one class of institution to another – from markets to hierarchy, or from community to hierarchy – have downstream implications on our society that merit consideration.  While we reorganize our decision architecture to meet the pandemic’s challenges, we may inadvertently damage our civic capacity, the social fabric that sustains democracy and community organization.  To borrow the phrasing of Acemoglu and Robinson, these actions may push us out of the narrow corridor by reducing our civic capacity.

The Choice: Diverse Institutional Forms to Make Social Decisions

A flourishing society and a moral political economy require a diversity of institutional types, including community-based organizations and democratic institutions to push back against markets and hierarchies.  Each institution should be suited to its task and complement the weaknesses of others.

Achieving a robust portfolio of institutions requires engagement with multiple disciplines, not only economics. To that end, in each of the past two years an interdisciplinary group of scholars has convened at the University of Michigan to contemplate what we call The Choice.  The Choice refers to society’s choice of what institutional form to use as it allocates resources and takes actions. Owing to technology, we have more flexibility in the institutions we choose.   In addition to markets and hierarchies, we can create democratic bodies, empower communities  to collectively create and enforce rules and norms (also called self-organization), or we can hire a team to write an algorithm.

The best short- and long-term answers to The Choice are often counterintuitive.  Ironically, the logic of market efficiency applies quite well to donated goods. Candice Pendergast showed that food banks perform much better if they use markets to allocate their donations.  Similarly, Richard Titmuss found markets to procure blood to be far less effective than relying on volunteer organizations. That’s not the end of the story. The blood distribution problem is solved via markets: donated blood is sold to hospitals, with market-incentivized innovations to improve the supply chain.  And then how do hospitals make purchasing decisions?  Hierarchically.

As should be clear, The Choice offers up any number of perplexing questions.  To be honest, we saw our events – The Choice conferences – as a way to engage academics in some big think fun.  We framed the conferences in part as an enlargement of a century-old debate about how to allocate goods: use markets or central planning?   We merely expanded the question of Smith vs Weber to include Mansbridge, Ostrom, and Bezos.

And now, suddenly, The Choice is all too real. The current pandemic offers up multiple instances in which society makes a choice among types of institutions.  Consider the task of allocating limited ICU beds or COVID tests.  We could use a market model.  Prices would equilibrate to where supply equals demand – an efficient outcome, but only in the economic sense.  Rich people would be tested and get beds.  Poor people would not.

We could instead create a hierarchy that processes applications.   People could no longer buy beds or tests, but this new process would create other challenges, notably guarding against corruption.

But why not other institutions? We could elect local boards that vote on who receives beds, or at least decide on the criteria.  The democratic solution might not be as efficient as a market or a hierarchy, but it could be fairer.  We might empower each community to self-enforce the criteria. Finally, we could leverage big data and have people type information into a website and allow algorithms select who gets a bed or a test, applying deep learning tools.

We also confront The Choice as we decide how to produce more masks and respirators and emergency responders.  Do we offer a prize (a market solution)?  Do we rally the nation’s craftiest via social media to stitch their stacks of quilting fabric into masks (a community solution)?  Does the government impose the emergency powers ordinarily reserved for wartime and demand that Ford Motor Company re-engineer fan parts into ventilators?  Do we empower the military to expand health care services?

More broadly, how do we prevent economic collapse?  Should the government protect returns on investments and business expenses?   Should they helicopter money and let the market work?  Or should we leave the rescue to self-organization, like the Stanford students’ GoFundMe to support the university’s furloughed staff? Similar questions play out at every level of government. Should Philadelphia, which is short of ICU beds, invoke powers of eminent domain to take a vacant hospital at what would have been a fair price last week?  Or should they continue to try to negotiate a market transaction knowing they are on the losing end of a holdup problem?

Ironically, even though over the past quarter century markets have been supplanting hierarchies worldwide, and we apply algorithms to choose driving routes, guide purchases, split checks and even find life partners, the great majority of pandemic policy proposals involve central planning.  We see a few market proposals and some algorithms, but far fewer democratic or community-based solutions.  A notable example of the latter is a proposal to call for volunteers who would be injected with the virus in order to test vaccines.

Long Term Implications: Spillovers and a Healthy Civic Capacity

We should be concerned about the lack of diversity in institutional types. As we rush to formulate a collective response, we should keep three lessons in mind.

First, we need to protect—and even transform—our civic capacity.  Institutions do more than allocate resources; they determine who gets what information, influence our belief systems, encourage certain behaviors and norms over others, and they can enhance or destroy networks of trust. These attributes – knowledge, beliefs, behaviors and norms, and trust relations – make up a society’s civic capacity.  And we need civic capacity for society to flourish.

When the government takes control and imposes restrictions on what businesses and organizations stay open and whether we can leave our homes, they remove individual agency and mutual reliance.  It literally wears away at our social fabric.  To counter that decay as our quarantines reduce connectedness, it becomes even more important to involve institutions that encourage interaction.  (Hint: we probably want more democratic deliberation at the level of neighborhood and town.)

The types of spillovers produced are relatively straightforward. Hierarchy promotes specialized knowledge, rule following, and networks organized by authority.   Hierarchies are not good at adapting on the fly.  Markets may be better at that, but at a cost.  Markets promote specialized knowledge acquisition, strategic, often self-interested behavior, a belief in the rationality and self-interest of others, and network connections formed for material advantage.

Democratic institutions can produce favorable spillovers.  Deliberative democratic institutions promote general knowledge, norms of reciprocity, beliefs in collective interest, and dense social networks.   Allowing communities to organize their own solutions has even more beneficial spillovers to civic capacity.  Community interactions promote common knowledge of processes, high degrees of trust, mutual understanding, beliefs in equality, and rich social networks.  Because algorithms ask the user to input her preferences, it can encourage self-reflection and self-interest, but may reduce reliance between people.

Second, evidence of how the virus has spread across the globe shows that cultural differences matter as much or more than institutional choices.  Thus, policy should focus as much on culture as outcomes.  Countries that have done best at containing the virus either score low on individualism (China, Korea) or high on rule-following (Germany) or both (Singapore). The United States scores almost pathologically high on individualism and low on long-term orientation.  We’re middling on rule-following.

Those features of our civic capacity bode ill for our long run capacity to handle a pandemic, leading to our third point.  This is not the first pandemic, and will not be the last, so building civic capacity may be as important as producing the most efficient immediate outcomes.

Consider two approaches to promote social distancing.  One is a purely hierarchical solution: a quarantine enforced by the police.  A second is a community-based solution: allowing communities to develop rules, norms and other enforcement mechanisms.  The best institutional solutions may well by hybrids.  A community may create democratic bodies to generate and deliberate ideas.  It might construct a market in which people are paid to enforce norms, or develop a mobile app (an algorithm) to coordinate activities to reduce crowds.  It may ask the police to be available as back-ups should self-organization fail; that complementarity will boost the effectiveness of community solutions.  Hierarchy is needed to break the collective action problems and coordination problems inherent to federal government.

The community-based approach may be less efficient initially, but it could build civic capacity in the form of stronger trust relations and other-focused behaviors that yield benefits two weeks, two months, or even two years from now.  At this moment, the economy needs an infusion of money badly.  It does so in part because Americans (both individuals and corporations) save so little.  A more equal wealth distribution and better saving habits would have us in a much better place.

In sum, in this time of crisis we must make decisions with care.  We need long-term thinking when answering The Choice. Having the military take over health care and allowing the government to impose quarantines and closures of business may flatten that curve now.  But what effects do they have on our civic capacity to meet future challenges?  As we take today’s most prudent measures to protect our physical health, we should also be mindful of our long-term social health.  As the turn toward hierarchies damages our capacity to support a thriving democracy, we might act now to introduce institutions in parallel to the hierarchical ones that will support our civic capacity.  If we do so, we may not only salvage our current social fabric, but weave one that is much better equipped to flatten future curves.

 

[1] “Theodore Roosevelt on Bravery: Lessons from the Most Courageous Leader of the Twentieth Century”, p.4, Skyhorse Publishing, Inc.

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