How Does Government Work At All?

Stick ‘em up for peace, in Venezuela the hands are still too visible (ABC 2014)


Ricardo Hausmann, professor of economics at Harvard, has an oped today at Project Syndicate in which he argues that an invisible hand operates in government just as it does in an economy. Exactly as in the modern economy, there is no possibility of central control in a big, complex, information-intensive modern government. So the modern state has evolved a mechanism for self-organisation that is equivalent to the market price-profit system for providing information and incentives which allow political systems to “identify problems, propose solutions, and monitor performance”. Venezuela does not have this mechanism, the USA does. The mechanism is intimately linked to the conditions required for modern democracy. Democracy is an open structure that helps society cope with complexity and coordination. Rich countries are rich because they are democratic, or vice versa! 

So far so good - I can agree. So here’s my complaint. I find it surprising that Hausmann never tries to identify the nature of the mechanism for self-organisation. He is certainly wrong to reduce the invisible hand mechanism to ‘democracy’. What do invisible hands of economies and governments share in common? What does the US democracy have that Venezuelan democracy does not? The answer is deceptively simple. Being a blogpost -- I confess there is no editor in sight, except me, but like most people I’m blind to my own faults -- I will cut corners too. Much of what I say will be familiar to political scientists, sociologists, historians. Most economists - Hausmann is in the category - are super-reductive about government. 

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The starting point is recognition that government or state is a subdivided system. The top tier subsystems are law, administration, and representation. Hausmann is assuming these are all the same thing. Democracy is really only the representational subsystem. Democracy cannot be democracy without law and administration. The three subsystems are reciprocal, they need each other, they condition each other, they must interact. None is able to operate alone. None has an overriding coordination function (on that point Hausmann is correct).

In advanced institutional systems there is an ‘invisible hand’ at work only because the three subsystems, which have no single or common purpose, share one vital modern feature -- impersonal procedures, i.e. impersonal rules about impersonal behaviours which are impersonally enforced. The institutional spheres are separate. They have to be able to understand each other in order to work together. They must be able to ‘read’ each other. 

Hausmann says democracy is visible in “the structure that reads the millions of pages of legislation and monitors what government agencies do and do not do”. I think he needs to be reminded that Soviet structure was also very good at producing and reading documents. So was the Spanish colonial structure, possibly even more so! It’s far more important that the committees in one branch of government can, generally-speaking, read the minds of the committees in another branch, in the knowledge that other minds are similarly motivated and similarly constrained. In other words, read their incentives prior to reading their papers.

To ‘read’ each other the three subsystems have to be sure -- automatically without even thinking about it -- that they speak the same language. What this means, in essence, is they all understand the norm of impersonality that underpins modern governance. They could not interact smoothly and routinely without knowing that each of them probably responds to the universal impersonal code (and, if they do not, they will probably be found out and will probably be punished). The incentive each person holding public office in a modern state has in common is a necessary reciprocity between the functionally distinct -- and often competing! -- tasks of representation (congress, parliament, legislature), administration (civil service, bureaucracy, public agencies), and law (judiciary). Reciprocity cannot be achieved into the future unless their respective behaviours are somewhat predictable. 

Knowing this makes their working life easier! They go home from the office unstressed. In their routine interactions none of them routinely acts with personal discretion. Discretion is stressful and complicated! Discretion regularly has distressing unintended outcomes.

The invisible hand is blind. I’m sure Adam Smith meant it to be blind, though we can’t be sure since he hardly ever mentions the invisible hand, and never describes it. It’s difficult to describe blindness. Since the invisible hand is blind it cannot and has no need or desire to distinguish between the prettiness or ugliness of any individual bureaucrat, lawyer, or politician. The invisible hand is thoroughly impersonal. Even economists know the essence of an advanced economic transaction is “impersonal exchange”. Right? We can inform them now why precisely the same impersonality exists in institutional transactions.  

Hausmann asks the central question: “Who controls the provision of the publicly provided inputs?”, by which he means the state services. Yale sociologist Jeffrey Alexander wrote: “The more individuals share conceptions of their impersonal worlds, the more individual practice can be subject to extra-personal control, the more it submits itself to universal criteria of evaluation.” There you have it. That is the essence of the difference between the USA and Venezuela. The USA - despite gridlock - still has this universal impersonality thing in spades. Venezuela borrowed a rusty old Russo-Cuban spade to bury the capitalist impersonality thing. Oh yes, it was present in the Venezuelan institutions like a good healthy seed waiting germination *Before The Coming of Chavez*, before Hausmann rationally left home to find an easier and more meritocratic lifestyle in *The Promised Impersonal Land* up north. 

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A little theory. Even within a single institutional subsystem, exclusionary practice can still be counterbalanced by opportunities and rights to marshal the resources of a competing subsystem against the threat. Examples of these ‘checks’ might include: political action to eliminate bureaucratic corruption; legal actions to resolve disputes between producers and consumers; legal action against government policy; and political and administrative action to counter prejudices in the legal system. These broad guidelines help us comprehend the much neglected yet indispensable interactions between subsystems of good government. 

Unique to modern society, therefore, is a process by which formal institutions interact systematically and together evolve spontaneously in the absence of a single coordinating mechanism. A magnificent achievement is it not? It could not have come about in the absence of organisational behaviour within institutional subsystems conforming in most instances to impersonal procedural norms. It’s easier to calculate action or outcomes in a social order in which institutional behaviour is oriented to universal rules as opposed to the arbitrary commands of particular persons or the preferences of particular groups.

The analogy with the predictably regulated market environment for business firms is not perfect, however neither is it wholly misplaced. The everyday procedural practicality of state activity depends on whether common norms of behaviour and known rules of action will prevail. The expectation is that actors in each sphere share a general interest and face similar organisational sanctions even when they do not share exactly the same interests, values, or ideologies. 

So, a common goal in both the institutional and the economic spheres is to achieve relative certainty about the organisational and regulatory procedures, which facilitates action by permitting more or less accurate expectations about how others will act and react.

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At least Hausmann has done everybody a service by reminding them that ‘democracy’ is not just voting. No! Let’s spell it out more clearly. Democracy refers to the quality of the impersonal legal procedures governing -- monitoring, deciding, enforcing -- the selection and behaviour of representatives through predictable, simple, generally-understood rules. 

There have been several books since 2009 with the correct assumptions about impersonality running explicitly all the way through them -- e.g HERE HERE HERE -- so there is no excuse for any economist failing to get to grips with it. Of course we await publication of Francis Fukuyama’s new book to receive additional knowledge and insight about the state’s evolution. The blurb for Volume Two of his Political Order declares that it will “complete the most important work of political thought in a generation [by] taking up the essential question of how societies develop strong, impersonal, and accountable political institutions”. 

Strong is impersonal. Weak is personal. The Invisible Hand, although it is as blind and impartial as a Massachusetts Bat or a Caracas Mole, has by far the strongest hand. 




Michael G. Heller ©2014

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