Beyond the plc
On Monday Civitas published a book written by me and Paul Ormerod entitled “Beyond the plc”. A press release and summary can be found on Civitas’ website here.
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In this article I want to provide some background to this work in two broad ways. First, I will frame our thinking in the context of collective action (helping distinguish it from any political ideology). And, second, I’ll mention how our approach takes an evolutionary (or ‘complex’) view of the economy. When discussing political ideologies, I will use libertarianism and statism as reference points, well aware that these do not represent the plethora of views in political philosophy.
While not a homogenous group, many libertarians argue that we should minimise the scale and role of government in society and the economy. I have a lot of sympathy with that since I believe that freedom for individuals is an important foundation stone for successful societies. However, I have not seen any fully robust and compelling theoretical frameworks from libertarians explaining exactly when and how government action is sensible (though Hayek had a good crack at it). I shouldn’t be too critical: the main problem, in my opinion, is that until fairly recently we have lacked the intellectual technology to understand the complexity of society, from which we can better understand collective action (both its nature and options for execution). I believe the new technology which can and will enable a better understanding of collective action is Complexity theory, as applied to social systems.
Many libertarians argue that broadly free systems gravitate towards what Hayek referred to as a state of ‘catallaxy’, which is a libertarian-speak for ‘an ordered society’. It is roughly equivalent to general equilibrium in economics. But the more extreme libertarians under-emphasise two important things, in my opinion. First, that broadly free societies gravitate to inequality over time due to positive feedback effect (on the whole rich people get richer and vice versa); and, second, society is replete with collective action challenges resulting from people interacting.
I’ll leave the inequality point for another article. The need for collective action can be seen in my domains of life, transportation being a good example because of the potential for damaging interaction i.e. collisions. In motoring we are required to maintain cars to a reasonable standard (MOTs in the UK) and to pass driving tests, requiring us to learn the ‘rules of the road’. Also, technologies are deployed to make the roads safer e.g. traffic lights and roundabouts. In effect, society acts collectively to minimise the risk of harm or death on the roads and institutions are deployed to maintain this ‘interaction architecture’. Importantly, some of this architecture would emerge naturally, without institutional interventions e.g. which side of the road we drive on would probably emerge quickly, but I don’t think all useful motoring architecture would.
More generally, we might say that reflexivity means that an ideal outcome in some interaction is not always guaranteed, or determined, without some form of co-ordinating technology. In game theory terms, nash equilibria can be different to socially preferable outcomes, a point well demonstrated by the Prisoners’ Dilemma.
Of course, in many (probably most) interactions, no institution or technology is necessary e.g. two people walking along a corridor too narrow for both can work it out themselves. But for some interactions, like at road intersections, some technology can be useful to ration space safely. I have written elsewhere that recessions can be thought of as collective action challenges, as can infrastructure projects like Crossrail. It is a concept not limited to challenges like ‘the tragedy of the commons’.
Looking at the other side of the political spectrum, it is important to emphasise that statism (by which I mean centrslised control) is not the answer to all collective action challenges. The need to co-ordinate people’s interactions in certain domains does not mean that some hypothetical omniscient national policy maker should do it. In fact, the information required for people to self-organise is very often distributed among the population, a point Hayek made brilliantly in a lot of his work. He rightly argued against top-down control-freakery by people who did not – and could not – know enough. (To be clear, Hayek often referred to centralised control as ‘collectivism’, which is not what I mean by ‘collective action’).
So if collective action is useful in society but statism isn’t the answer, where does this leave us? There are two broad implications, in my opinion. First, we need to work on the theory of collective action and, as argued by Elinor Ostrom, this needs to be done in the context of Complexity science since social systems are inherently complex. Second, we need to be a lot cleverer than crude statism about how we ‘do’ collective action, wherever it is desirable and feasible.
The book Paul and I wrote for Civitas was (I hope) written with these two points in mind. In the book we developed a complexity theory-inspired understanding of what organisations are and what organisational forms are, before considering whether we should act collectively in this domain (and, if so, how). Our policy recommendations should be viewed as forms of collective action built from a complexity-inspired view of the economy. Let me outline some of the key points.
- Consistent with Organisation Theory, we argued that organisations exist to integrate the actions of specialists but we added to this the importance of creativity that arises within heterogeneous groups (cf Peter Allen’s work). Integrating experts well is important for efficiency whereas creativity is important for resilience i.e. organisations need to respond then the world changes. As argued by Bernard Lietaer, efficiency and resilience are essential for survival (and flourishing) in complex ecosystems.
- In the book we assume that organisational forms are defined by legislation, the role of which we argue is to mitigate uncertainty for stakeholders. Metaphorically we might think of organisational forms as being like species in an ecosphere (say, felines) whereas specific organisations are equivalent to individual organisms (e.g. a specific cat).
This role of ‘mitigating uncertainty’ is at the heart of the form of collective action we recommend in the book. The plc’s success was in part because in the original Joint Stock Companies Acts (1844 and 1856), the relationships between various stakeholders were well defined and this helped to reduce uncertainty for investors. These acts did not cause the industrial revolution since it was already underway but they helped to catalyse larger-scale, publicly-sourced investment in corporations.
- This mitigation of uncertainty can be best achieved, we believe, by legislation supported by a mature legal system and enforcement. So, for example, if owners renege on their debt obligations, the combination of an unambiguous piece of legislation and legal institutions will help creditors recover their investment. Ex ante this reduces investment uncertainty, thereby encouraging investment. It is tempting to leave such things to common law but common law (in effect) acts with a lag in an evolving society, which maintains some uncertainty. Legislation can be more contemporaneous and therefore relevant, so there is a role for legislation in the collective action we promote.
- An important piece in the analytical jigsaw was to think of the economy as an evolving process, not as a static ‘thing’. Once we frame the economy in this way, and consider organisational forms like species in an ecosphere, we can see that the plc looks increasingly obsolete in the digital age. It is still relevant to industrial firms but these are a shrinking proportion of the 21st Century economy.
- The implications of economic evolution is that as a society we need to observe the emerging patterns in the economy and offer entrepreneurs a portfolio of organisational forms which suit their heterogeneous and evolving needs. An excellent example of a new form is the Community Interest Company (CIC), which is being used by thousands of social entrepreneurs today. Interestingly, the CIC was promoted by the Cabinet Office and not the DTI (at the time).
- In practice, such observation of the evolving economy and the consideration of potential new organisation forms needs to be done by an institution with relevant expertise, in ‘conversation’ with the rest of the economy. In the book we argued that the institution most suited to this role was the Department for Business, Innovation and Skills.
To conclude, a point I wanted to emphasise here is that our book does not reflect any political ideology and it is not meant to support either the left or the right. Our work builds on the important advances in complexity theory, recommending how we can, as a society, act collectively to enable economic activity. Some libertarians would probably view it as left-ist because we dared to suggest there is a role for an institution (in this case a government department). Equivalently, socialists would probably view it as right-ist because we want individuals and firms to lead in economic activity, not the government.
I look forward to reading this book, not only for its focus on civil society and complexity, but also for its focus on economics as an evolutionary process. Research will show that the roots of this approach might also be found in Joseph Schumpeter, and for me, the evolutionary approach might be considered the holist theory in economics. Following Schumpeter this approach shares certain language from the biological evolutionary approach that takes into account how innovation systems evolve over time. Significantly Schumpeter, like Schumacher, was an economist who tried to integrate sociological understanding into his economic theories.
Theorists suggest that his ideas on business cycles and economic development could not be captured in the mathematics of his day. It is suggested they needed the language of non-linear dynamical systems to be partially formalized. Hence, the critical role of complexity theory in social, political and economic transformation is now more clearly established. your work will no doubt carry this forward and you are saluted.