How Not to Become A “Problem-Mover”: Why Understanding Institutions Matters

Misunderstanding underpinning reforms can have far longer and much more far-reaching consequences than detrimental effects deriving from ill-intent. Or as Hirschman put it, ineffective policies stemming from laziness or incompetence are “more durable and stifling as it is both unambitious and escapable” (Hirschman, 1970). In Tolstoy’s famous War and Peace, properly describable as “a detailed casebook of human inadequacy and imperfection”, it is not surprising then to find a vivid description of this phenomenon (Tolstoj, 2005). Despite Pierre’s idealistic and pure intentions, his philanthropic policies bare little fruit and often cause more harm than good, thereby providing a perfect case-study of the way in which misunderstanding about how the world works produces flawed reforms.

Analysing Tolstoj’s detailed depiction of human nature might sharpen our understanding of institutions in two ways. This essay will examine three of Pierre’s reforms in two paragraphs each: the first to analyse, through the lens of North’s institutional framework, the presence of institutions and how this explains why Pierre’s initiatives fruit unintended results and the second to explore what this tells us about difficulties and blind spots in studying institutions. I will argue institutions arise from the need to shape people’s decision-making, yet its influence is challenging to study as they are embedded in societal structures. Nonetheless, understanding institutional mechanisms is key to limit unintended outcomes.

But what were Pierre’s policy reforms to begin with? First, women with children may not be sent to work. Secondly, every estate should build a school where children are obliged to attend. Lastly, and most radically from all, his peasants should be liberalized from serf-rule and not be overworked in the meantime (Tolstoj, 2005).

The effects of the first reform, preventing women from being sent to work, illustrates that both formal and informal institutions “define and limit the set of choices” for individuals and shape their decisions (North, 1990). Moreover, incentives from informal institutions can alter because of changes in formal institution (North, 1990). Sadly, after women were not allowed to work anymore, they had to work “even harder” on their own land (Tolstoj, 2005). This adverse effect can be understood from the interplay between formal and informal institutions. With a jobless housewife, husbands were incentivised to compensate the loss of income by working more, which altered the most efficient division of household chores.

From a Coasian point of view, the discrepancy between the intention and effect of this reform is a result of “not comparing the total product obtainable with alternative social arrangements (Coase, 1960).” It is easy to imagine a situation in which housewives would be better off not being sent to work. However, if such situation stands far from the real consequences, then basing policies on a fictional situation can create an even worse outcome. Therefore, a major challenge in studying institutions is weighing the benefit of a policy proposal against all effects, whereby unforeseen negative effects, for example indirect changes in the incentives from informal institutions, can be a significant blind spot.

Furthermore, not only influence institutions the choices of individuals by limiting the set of choices, but they also affect actors bargaining power. This determines the expected rewards or punishment from certain choices. In that way, the incentives are structured which in turn shapes human interaction (North, 1990). The second reform resulted in the priest responsible for education to oppress people and sparing only the pupils whose parents paid large bribes (Tolstoj, 2005). When going to school became mandatory, the priest’s bargaining power increased because the parents could not leave their children at home. Hence the reform gave him an opportunity to gain more rewards by utilizing his position, and he took it.

But why did Pierre not consider this possibility in his policy reform? An interesting parallel can be drawn with research on failing anti-corruption reforms. According to the authors, the reforms fail because of a “theoretical mischaracterization of the problem”, and especially important for this comparison is the notion that expected effects of a policy on people’s behaviour is ungrounded without understanding their motivations (Anna Persson, 2013). Indeed, children not going to school is a problem for the level of education. Ensuring they attend schools would be a logical step. But there lays a huge gap between Pierre’s ungrounded expectations of how his policy would affect the priests’ behaviour and its real effect. Hence the outcome of altering incentives will be a ‘black box result’ without understanding the drivers of an actor’s choices. The lesson being, if social studies want to provide tools for improving institutions, it is not enough to simply establish the existence and size of a problem. Instead, the system causing the problem needs to be understood too.

The foregoing analyses have discussed that institutions are necessary for making the set of choices clear and arise from differences in bargaining power. Yet why we need institutions has not been dealt with explicitly. The last reform will provide an opportunity to examine this aspect, because it was not implemented at all. We need institutions to deal with the uncertainty of the world, given our limited mental capabilities for two reasons. Individually, it is simply impossible to make every choice consciously, thus by structuring human life we save transaction costs. Collectively, this structure limits the uncertainty about other actors’ decisions. Since actors have “private objectives”, institutions will alter if this benefits actors with bargaining strength (North, 1990). From all Pierre’s reforms, the liberation of peasants from the serf-rule would harm the private objectives from powerful actors, headmasters, the most: without a legal obligation, it becomes uncertain if peasants will still decide to work for them. Hence the headmasters used their resources to prevent this reform, with success (Tolstoj, 2005). Abolishing this institution would erase too much certainty.

Hellman’s study shows misjudging actors’ commitment can halt institutional progress (Hellman, 1998). Pierre could have known this but did not investigate. Whereas the headmasters increased output by gaining more work from men with the ban of working housewives and restrictions on overwork can be avoided, the consequences of liberalizing peasants are too harmful and therefore to be resisted. For studies on institutions to have an impact, the true commitment of actors should be considered carefully.

Imaginably, a competent legislator with ill-intent might do much more harm than an incompetent legislator with pure and idealistic intentions. Nevertheless, this essay has shown well-intended reforms demand scrutiny since unintended outcomes can be devastating. Institutions arise from differences in bargaining strength, are necessary to clarify choices and are needed to limit the impact of uncertainty on the predictability of actors’ decisions. Some reasons for solutions causing more problems have been examined, but more exist. Whether the matter is about household’s labour division, the reaction of the priest on his increased bargaining strength or the risk of uncertainty for headmasters, studying institutions is generally challenging because its influence takes place in human minds. Choices manifest institutions are influential, but the process and precise influence remains uncertain, making blind spots likely. Future research could explore what amount of uncertainty is acceptable for proper policymaking.

For Tolstoj, willpower is the decisive factor for achieving the best results (Tolstoj, 2005). Likewise, notwithstanding the overwhelming number of possible missteps, embracing education about institutions remains our best shot for limiting the number of unintended consequences, as one will better understand the possible outcomes of his policies. Or at least, that is a hope the writer of this essay holds on to while furthering his studies.

Bibliography

Anna Persson, B. R. (2013). Why Anticorruption Reforms Fail- Systemic Corruption as a Collective Action Problem. Governance: An International Journal of Policy, Administration, and Institutions, 449-471.

Coase, R. (1960). The problem of Social Cost. Journal of Law and Economics, 1-44.

Hellman, J. S. (1998). Winners Take All: The Politics of Partial Reform in Postcommunist Transitions. World Politics, 203-234.

Hirschman, A. O. (1970). Exit, Voice and Loyalty; Responses to decline in firms, organizations and states. Cambridge: Harvard University Press.

North, D. C. (1990). Institutions, institutional change and economic performance. In D. C. North, Institutions, institutional change and economic performance (p. 152). Cambridge: Cambridge University Press.

Tolstoj, L. (2005). War and Peace. Bungay: Penguin Random House.

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