Functional Institutions are the Exception

Every great company is unique, but there are a few things that every business must get right at the beginning. I stress this so often that friends have teasingly nicknamed it “Thiel’s Law”: A startup messed up at its foundation cannot be fixed.

-Peter Thiel, Zero to One, page 107

The Inequality of Institutions

Within nearly every institution bigger than a dozen people, insiders are resigned on how hard it is to get things done. They maintain a coordinated competence only barely above the level necessary to keep the institution in existence. Perhaps worse, many institutions persist for a surprisingly long time despite failing at their formal purposes; they’ve fallen, unwittingly or not, into new reasons for being. Unprofitable companies and declining nations often last longer than their critics remain solvent.

Most things fail. Things that exist have avoided failure. So far. Institutions we do see are functional enough to persist because of selection effects, not because humans are particularly good at making them work.

In my research, I found something that puzzled me: in any given type of institution: state, church, for profit or non-profit, there are some organizations that outperform the others by orders of magnitude. This is true even when comparing only institutions that have similar material wealth, human capital, and formal structures in terms of their ability to reshape the world in service of their formal purpose, their informal purpose, or perpetuating themselves. Regardless of the exact measure, exceptional institutions do exist, but they are rare.

An elegant explanation for this phenomenon is that everything is broken. When something works the way it should, it appears exceptional. It’s not that a particular institution started off with more material wealth or higher quality people than its competitors. Rather, it is simply put together properly; the cogs and gears fit.

A tornado cannot assemble a Boeing 747 by passing through a junkyard. Functional institutions are not spontaneously generated. The machinery, if it functions, was assembled by someone with good judgment: the institution’s founder.

The institution was also probably assembled properly from the start, rather than made functional over time. It is much more difficult to make a dysfunctional institution functional than to create a functional institution from scratch; Institutions will nearly always have internal forces that resist change, and diagnosing institutional dysfunction is usually very hard. If an institution is broken, it’s usually broken in many ways, not just one, and so discerning what’s going wrong in order to fix it is very hard.. This explains Thiel’s law: a founder’s best shot at creating a functional institution is to get it from the start.

This is not to say, however, that fixing dysfunctional institutions is impossible. A talented founder can do it, but it is hard. He must defeat those opposing him in such a one-sided way that he establishes peace, a peace in which he can build. He must then build well.

Most institutions are broken

I maintain that normal institutions frequently don’t effectively pursue their formal goal, but spasm ineffectively in its general direction. Often, however, like in education or medicine, this doesn’t appear to be the case. From afar, the institution looks functional. Research is being done, children are being inspired — there are even pictures!

These cases provide a challenge to our theory of rare functionality. How do we explain this?

We posit that the appearances are deceiving. The reality, under the organization’s facade, is by default one of a poorly run social club — a group of people with no stronger drive than fulfilling some of their social needs.

Unfortunately, institutions usually aren’t even well optimized for that; the formal purpose, when too weak to exert pull, becomes an obstacle. Many members don’t notice this or pretend not to notice. Specialization is haphazard; people often choose their fields based on social needs or other goals that are not tightly correlated with achieving the goals or the preservation of the institutions they find themselves in. Bottlenecks result in much wasted effort and local information being thrown away needlessly. Much effort is also lost in communication and political struggles.

Further, the number of people involved is usually too small to organize via market mechanisms, at least internally, and market mechanisms require certain working institutions to maintain them anyway. As a result, the institution also fails to effectively fulfill its members subterranean social goals.

In such an institution, efforts don’t multiply each other, but merely accumulate linearly. The sum of this activity is a noticeable but very weak optimization force. The optimization force, together with naturally occurring hierarchies, is quite sufficient to govern small tribes under conditions similar to those prevailing for most of our evolutionary history. But most institutions try to be something different.

Working order is fragile

When order emerges, it can be a dysfunctional one. A functioning machine can still be poorly designed, based on faulty assumptions or incomplete knowledge. It can also be unlucky — it is possible to pursue an excellent plan and build a functional well designed institution, but have the circumstances simply be too difficult to prevail.

Often, when there appears to be an outgrowth of impressive order without impressive results, it is a deception. Depending on the scale, this is sometimes maintained by charismatic individuals, or by a smaller and less impressive order of coordinated and enforced deception. The latter is particularly interesting, since the institutional energy is put into maintaining outside appearances instead of internal functionality; examples include various kinds of legal compliance, party lines, and more mundane public relations strategies. “Comrades, we have outperformed our quota!”

The order around us is also fragile and often more an illusion than a reality. Examples are numerous. The formal charters of companies never capture the reality of the office politics actually constraining and initiating actions. Areas that rely only on the police for safety tend to be dangerous. An army’s morale is fickle — should it falter, it reveals that the command structure has rested on quicksand. Soon after, it becomes unable to function.

An absence of designers

Why are there so few true founders that can assemble good institutional machinery? There are many preconditions, but I think the key one is planning, defined here as considering your actions in advance and improving the entire sequence, rather than just one step at a time. Successfully planning is the exception rather than the rule.

We fail to plan for many reasons. For one, we don’t have much time to figure things out. The world is large, and each of us has only a few decades at best in our prime. To make matters more difficult, much of the thought we do engage in is about making other humans treat us nicely or give us the things we want, rather than about discovering what is true. Desperate for social survival, we explicitly or implicitly agree to pay the long-term price for immediate improvement.

Thus, the “plans” we do make are not maps of actual future action towards the goals they claim to have. Rather, they become an agreed-upon lie, aimed at solving the immediate political problems of the people collaborating. This means the activity called “planning” is often an exercise in persuasion rather than engineering, with predictably bad results.

Given relevant knowledge, complying even with a benevolent plan, one that eventually fulfills our needs, requires us to postpone gratification. The self-domestication of mankind has barely begun to imprint this ability on the feral human animal. On the other hand, self-domestication has imparted a strong urge towards conformity in thought.

This is a useful feature in the components of the machine, as I will explain, but a bug for any would-be designer. The founder has to keep an accurate understanding of cause and effect over the extended lifespan of institution building they engage in. Should they lose track of that understanding, they will not have much of an impact, becoming tools of the institutions and circumstances they find themselves embedded in, rather than transforming them.

How we control coordination costs

Uncertainty about people’s behavior is an obstacle to local planning. How can we overcome it without paying the high cost of deeply understanding others?

We can sometimes work around the obstacle by simplifying our behavior — that is, making our actions follow a highly formulaic and even ritualized script, in order to increase predictability and standardize interactions. One example is what is usually called professionalism, another would be courtesy, another, the notion of being law-abiding. The most important, quite complicated form, is virtue. Failure to maintain all of these forms is apparent and common. When a community does merely marginally better at upholding them compared to most, the pay-off is large.

When we do manage to basically understand strangers, we still can’t be sure they don’t mean us ill. When stakes are low, and there is not much to gain for the other party from defection, we can still extend trust. What about highly competitive industries? Politics? In those high stakes contexts, where incorrect trust might cost us everything, we are forced to proceed as if they do mean us ill. It is a failure of due diligence not to. An interesting result of social science is that different societies, rest at different equilibria of such trust between its members.

We try and ameliorate such modeling problems by self-sorting: making sure those we talk and interact with are as similar to us as possible. This strategy can work well, since even slight preferences for similarity end up almost perfectly sorting people into self-similar groups (this is demonstrated by Thomas Schelling’s 1969 paper).

We also put effort into standardizing other humans, either by capture or manufacture, with measures like schooling and rewarding conformity.

Difficult communication and imperfect models of others entail uncertainty about behavior. Scarcity as well as locally justified assumptions of ill intent result in conflict. Ultimately, if no other means suffice, people reach first for local politics and then violence. As those struggles proceed, a costly process of reducing uncertainty takes place.

Even if we understand how they tend to think and what they are like, our allies remain hard to understand — especially if they have thought about a subject with which we are unfamiliar. Enemies will try to disguise themselves as allies.

Our coordination costs are typically high, and we pay them in forms so familiar that they are usually not noticed. There are also high costs to figuring out who is competent and who isn’t. Relying on others to help map out how the world works — a workaround to the limitations of our short-lived, small minds — is only a sporadically good idea and has failures that are hard to detect from the inside. Epistemically sound collaboration is rare. The design of functional institutions is then the products of individuals, not large cooperative groups.

A great man is someone with a secret and a plan

Our puzzle leads us to an interesting conclusion. Starting with exceptional institutions as unexplainable anomalies, we saw that functionality is the anomaly, and then concluded that a founder capable of bypassing some of the limitations of a typical human mind, himself an anomaly, produces this functionality. Only once assembled and functional does the machine possess the capacity for purposeful self-improvement beyond the founder’s design.

Great man history, disparaged in academic consensus starting in the late 19th century in favor of socio-economic forces history, deserves a second look. Great forces are perhaps only unleashed by particular great minds. The recasting of the pre-modern approach as “great minds history” provides a prophecy — one that extends beyond the human era. Those who find secrets, that is, correct and special knowledge about the world, and have the ability to plan, possess the building blocks of the next machine.