Friday, February 5, 2016

Robust Institutions Require Robust Values

It always seemed to me that the classical liberal argument about the importance of creating "robust" institutions is somewhat misleading by virtue of being essentially incomplete. As I understand it, it goes like this: institutional frameworks generate incentive structures, which in turn generate productive (or destructive) profit opportunities, which, when exploited, lead to prosperity or poverty. So far so good. But it also, crucially, claims that "robust" institutional frameworks will generate the right kind of incentive structures regardless (or at least largely regardless) of the intellectual and moral capabilities of those who operate within those frameworks. Classical liberalism is supposed to be a paradigmatic example of such a robust institutional framework, and thus, as Hume famously asserted, it can work well even in a society of knaves.

However, I don't think that any institutional framework is robust in the above sense. I don't think that any institutional framework can generate the right kind of incentive structures and unlock mutually beneficial profit opportunities unless the logical relationships on which it is based are genuinely understood and appreciated by those who operate within it. It is true that the emergence of specific hard institutions and the formalization of the corresponding incentive structures is very likely to further reinforce the beliefs and preferences that make these institutions effective in promoting their intended goals, but that does not change the fact that it is precisely those beliefs and preferences that have to motivate the initial emergence of such institutions if the latter are to be stable and effective.

For example, free market institutions can generate prosperity only in those societies whose members understand and appreciate, at least on an intuitive and practical level, the workings of the price system, the nature of competition as a discovery procedure, the allocative and signaling function of profits and losses, the importance of secure property rights for long-term entrepreneurial planning, etc. If no such understanding and appreciation is in place, then a top-down implementation of such institutions will not generate a genuine free market, but its grotesque caricature in the form of oligarchic kleptocracy or worse.

In sum, it is true that certain institutional frameworks are relatively better than others at promoting productive incentives and the underlying entrepreneurial values, but only provided that a sufficient level of respect for such values is already in place when the frameworks in question come into existence. In other words, even though certain institutions are robust enough that they can operate effectively in societies not composed of moral saints, it is implausible to suggest that any institution can avoid being turned into its knavish caricature if implemented in a sufficiently knavish society.

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