Distinguishing Agreements that Reduce Uncertainty in Human Interactions — Recommended Reading

North, Douglass C.  Institutions, Institutional Change and Economic Performance1990, New York: Cambridge University Press.   Click here for an excerpt.

What rules of the game lead to success?  Why do some societies thrive in certain games and others don’t, supposedly using the same rules of the game?  In this classic, very easy to read book, the late Nobel laureate in economics Professor North suggests that the interplay of institutions and organizations determines whether a set of rules leads a society to equitable growth and health or persistent inequitable collapse.  He starts by differentiating between the rules and the players (p 4), with institutions (the rules) as the “humanly devised constraints that shape human interaction” (p 3), and organizations (the players) as “groups of individuals bound by some common purpose to achieve objectives” (p 5).  “The purpose of the rules is to define the way the game is played.  But the objective of the team within that set of rules is to win the game…Modeling the strategies and the skills of the team as it develops is a separate process from modeling the creation, evolution, and consequences of the rules” (p 4-5).  From a holonic perspective, the organization is a whole that is also a part of a larger whole, defined by the institution.

With this distinction between institutions and organizations, Professor North provides a framework for understanding the myriad political-economic social forms that have evolved throughout history across the globe.  He suggests a model for how these different forms and their varied success result from the dynamic, historic interplay of institutions and organizations.  The framework integrates (1) the evolution of institutions as a form of rules to reduce the uncertainty inherent in human interaction, executed well or not, with (2) the costs of transactions (i.e., measurement and enforcement) and transformation, and (3) path dependence, to show how some forms are much more efficient than others at providing for stability or change in human interactions.  Two different groups can take up what seem to be similar rules, and because they start from different initial conditions and have different contexts, they can end up having completely different experiences and achieve completely different results, from great success to deep collapse.  I find this book to be a profoundly reorienting look at how the formal and informal constraints of a society, in the form of its institutions, influence daily human interactions and their evolution over time.  Providing great insights with easy language and rich examples from history, I highly recommend this book.

Do You Extract Value, Create It, or Release Its Potential? — Part 1 — A Historical Evolutionary Perspective

When you look at the resources around you, whether they are food, friends, or colleagues, do you want to extract all of the value you can out of them, work with them to create more value in them, or see how to release and catalyze the potential within them?

It might depend on the agreements you are in.  (Sociologists refer to these “stable, valued, recurring patterns of behavior,” or structures of social order, as “institutions” [Huntington, Samuel P. (1965). “Political Development and Political Decay”, World Politics 17 (3): 386–430].

Political institutions come in two phases, evolving from limited access, centralization of value extracting institutions to open access, inclusive, pluralistic, decentralization of value creating institutions, suggests Harvard historian Niall Ferguson (The Great Degeneration Penguin 2013), citing Douglass North, John Wallis, and Barry Weingast (Violence and Social Orders Cambridge 2009).

Professor Ferguson finds consensus amongst historians and cultural anthropologists that where you find the political power in the hands of a few elites, you find value-extraction political institutions.  Where you find inclusive participation, you find value-creation political institutions.  From an ecosynomics perspective, we take this one step further (based on our survey research in 93 countries and our field research in 9 countries) to suggest that where you find collaboration, you find value-release political institutions.

 Fig 1 070615a


Value-extraction institutions focus on how to appropriate the most value from a given amount of resource. There is only so much sweat in our workforce. How do we get the most we can out of it?  Once the resource is mined, it is done, thus requiring the institution to find another resource to deplete. This focus is preferred historically by groups that centralize power by…, such as the Spanish colonial empire.

Value-creation institutions focus on how to create more resource by managing the net effect of the inflows and outflows of connected resources. People create more resource value by finding more efficient ways to transform them, and more ways to use them, such as through continuous training, where people can continuously develop new capacities. This focus is preferred historically by groups that decentralize power to multiple perspectives in inclusive, pluralistic structures and processes, such as democracies and markets.

Value-release institutions focus on generating new resources and new ways of sustaining existing resources by seeing new possibilities and pathways for manifesting them over time.  Since we invite you to contribute your unique gifts to our community, we are continuously in the process of seeing your future possibilities and choosing with you how to develop them and the contribution they will make.  This focus is preferred historically by groups of people uniting their unique contributions to a shared higher purpose, such as value networks and social entrepreneurs.

If this observation amongst historians and cultural anthropologists holds, then there is a strong correlation between who holds the power to decide (type of nomics) and the relationship with resources (type of political institution).  Which relationship do you want to the resources around you?  Extractive, creative, or potential-releasing?  Do you prefer centralized control, inclusive and pluralist process, or collaborative contributions of unique gifts?  Maybe one comes with the other, and maybe you can choose.