By Chris Davies
The widespread coming-to-prominence of the New Institutional Economics (NIE) school, which was given a little push recently by the sad news of Elinor Ostrom’s death, has brought to the fore the importance of economic structures. This is surely a good thing: by acknowledging the importance of institutions, formal and informal, the NIE school has helped to root economics in the real world rather better than the old neoclassical models.
But having been doing some digging of late in the fertile soils of both NIE and technology theory, I’m struck by the absence of links made between the two. This is particularly striking when it comes to NIE, where technology is often treated as simply an exogenous feature of the system, rather than something that is both endogenous and a major driver of change.
This is of interest because it strikes me that we may be in the middle of a crucially important period for human development, particularly in the West, the development of which is being driven by the interplay between technology and institutions. My argument goes something like this:
- Human society is a type of complex system;
- Complexity involves the development of institutions, which looks a lot like the concept of self-organisation in Complexity theory. These mechanisms marshal and sometimes limit the uncertainties that come with complexity;
- Institutions can stimulate innovation, particularly when institutions happily promote the effective distribution of knowledge and reward creativity;
- Technology diffusion is most often a positive-sum game: there are winners and losers but more often than not society enjoys a net gain overall;
- As innovation results in the emergence of new technology, complexity increases and new challenges are created, particularly in managing the dislocation caused by those who lose in the technology game, which might require new institutional responses. Indeed, it can reasonably be said that institutions and technology co-evolve, which may be one of the reasons why a number of previously vibrant societies in history appear to stagnate both institutionally and technologically at the same time (e.g. China under the Qing);
- The effects of our institutional responses to change are not entirely possible to predict (thanks to the non-linearity of our complex social systems and the concept of emergence), which means that there might need to be a process of refinement before the institution becomes fully effective;
- Unfortunately, because of its complexity, our social system is never stable, meaning institutions are unlikely to ever reach a position of “optimal” effectiveness;
- The world is now changing rapidly, which enhances the last point. The optimization of institutions in a steady state is an increasingly elusive nirvana.
This last point is what makes our current situation so interesting. As Donald Schon pointed out in the 1970s, for most of human history technological change has been sufficiently slow that we have had plenty of time to adjust to it. Contrast the time it took the steam engine to spread from invention to widespread social and economic effect with the time it has taken for the internet to have an equivalent impact. There was plenty of time to adjust to the effects of new technologies in the past, e.g. it took most of the nineteenth century for the railways to kill off the canals. Now, technological change is so fast and so pervasive that entire industries are transformed in less than a decade: look at how far the newspaper industry has been transformed by the internet in just ten years, with book publishing likely to go the same way soon. Indeed, W. Brian Arthur has gone so far as to argue that the whole basis of the economy as it exists today is being overhauled through technological change, a point on which he is probably right.
The upshot of my argument is that technological progress now happens so quickly that we have limited time to manage its social and economic effects through institutional change. This is particularly difficult for the losers in the technology game, who may have to transform their lives to face a new economic reality. I’m thinking, for instance, of those former industrial communities in places like Wales and the North-East, where technology has enabled the emergence of a global market that has simply overtaken them. Our institutions have yet to be recast in such a way that enables people in these places to catch up and to add value to the new economy, instead trapping them in conditions of chronic worklessness. Individuals, companies and the whole economy need to be more resilient and adaptable.
Yet even if we could develop a new institutional framework to respond to this kind of change, it would probably be out of date as soon as it were operationalized. This is again a function of technological change. Instability becomes the norm.
In response to this challenge, it has become easy for us to use the welfare system and cheap credit as means of compensating the losers. By transferring some of their gains from technological change to the losers, in the form of benefits funded through taxation, the winners are ensuring that the losers are compensated. But the problem has of course been that the redistribution has been both limited and unsustainable, with much of the funding for compensation coming from borrowing. This interpretation also ignores the fact that receiving jobseeker’s allowance has substantial detrimental feedback effects compared to being in employment e.g. people become long-term unemployed, which has a social stigma.
If this argument is correct, I’m not yet sure what it means for policy. Clearly we need a better response to support those who have lost out from technological transformation, one that moves beyond simplistic attempts to re-skill workers to staff industries whose long-term survival may be doubtful. An answer to the question of what that better response looks like, however, is some way off.
What we can say, however, is that we need quickly to move beyond sterile debates around countering the pernicious effects of big corporations and the 1%, or how we drive the “undeserving” poor off welfare and into work (the latter having particular salience at the moment). If my hypothesis is right, meaningful and persistent levels of structural unemployment are the unanticipated consequence of the very process of technological improvement that also contributes to growth. In the same way that the problem appears to be an unwelcome product of complexity, however, so the solution is also likely to be found in analysis of complex systems. Maybe a challenge for the Synthesis brain to work on?