Made to Measure: A History of Institutions


Appears in Fall 2013 Issue: We Believe in Institutions
September 1 st 2013
The Institutional Revolutionby Douglas W. Allen. University of Chicago Press, 2011. 288pp.

Commuting Down the Road of History

On a typical morning approximately 10.6 million Canadian workers hop in their cars and head to work. They drink this up, out of habit, like a cup of morning Kafka. (If you wish to understand the relationship between Kafka and the 400 series of highways in Ontario, I recommend a visit to the Greater Toronto Area. Short of that, you can read the dystopian horror otherwise known as the Stats Canada report, "Commuting to Work" [2010].)

But as I write, it isn't a typical morning: it's the third week in August, and in Canada that means all (ok: most) of those commuters are on vacation. So instead of the daily commute, they're headed to the lake with their 1.8 kids where they will reacquaint themselves with why they love the city country.

I open with a set of seemingly inane statistics not out of a desire to put you to sleep, but to note that the very ability to cite such statistics tells us something about the complex set of institutions that shape how we live. These days, commuting on a public highway built and maintained by the state, policed by a public law enforcement company, which is also built and maintained by the state, all paid for with taxes collected through a central tax collection agency also built and maintained by the state, is so commonplace that we don't think of why or how such arrangements came to be in the first place.

Nor do we give it a second thought that once a year, every year, we take off on a paid vacation for two weeks expecting to return to our places of employment. And we almost never stop and ask: Why is the government collecting and collating information about how satisfied Joe and Jane Commuter are with the Friday morning drive to Bay Street?

And yet things like public roads, central tax collection, individual relationships with employers based on a wage system, and the government collection of a host of data about the way their citizens live, work, and move, are, as Douglas Allen notes, relatively new. We might assume that these are just the way things are, and the way they always have been, in saecula saeculorum, but they are not. As Allen shows in tremendous—and I might add fascinating and persuasive—detail, these commonplace parts of our lives came as the result of what Allen calls The Institutional Revolution.

The Invisible Economic Revolution?

How does one not notice a revolution? Well, because, as Allen notes, the institutional revolution was less like the guillotine that marked the French revolution—quick, brutal, and very noticeable—and much more "like the current of a great river—slow and barely noticeable at the surface, but deep, powerful, and capable of profound changes underneath."

We don't notice the revolution because "institutions tend to last longer than any one person, and, as a result, even a relatively young institution can feel old to the current generation." When you are floating on the surface of a great river, the water appears not to move. There are but two ways to appreciate the strength of the river's current: you can look at the shore and realize that you are miles from where you started, or you can jump in and try swimming against the current.

Allen's book does the first. He takes us on an aerial tour back up the river to show how modern institutions developed in the way they did. And, almost from the moment he takes off, you notice that "we do not have to go far back in time before institutions become foreign to our modern senses."

The tour is a fascinating one because he focuses on a very specific set of changes—those that occurred in public governance—within a very specific framework: economics.

Before we head into his thesis and explore its implications, it's important to head off one critique at the pass. While Allen is clear about the importance—and even the centrality— of economic factors in the institutional revolution, and how those shaped the economic changes that came as a result of the industrial revolution and our modern life, his book is not inherently reductionist. Though he makes a strong case for the ability of economic factors to create a "unified theory" explaining otherwise puzzling changes, he never suggests that economic factors were the only forces at play: he is not Karl Marx, nor is he strictly materialist. Time and again throughout the book, he acknowledges that a multiplicity of forces shape institutions, and therefore history. The book is read most fruitfully as a deep exploration of how one particular aspect of life—that of how we respond to the problem of scarcity—shapes history (and impacts other aspects of life). When read this way, this book is extremely rewarding and provocative and offers reams of new possibilities for understanding our world, some of which we'll explore a bit later.

Statistics and Sabres

Allen's thesis is so understated that when I first read it, I laughed. Here it is in all its restrained glory:

The reason why the pre-modern world had institutions different from the modern world was simply because circumstances were different. The reason why the Western world went through an Institutional Revolution was because those circumstances changed. And the most important circumstance to change was the ability to measure basic fundamentals such as time or distance. This economic framework not only provides a unified theory for many pre-modern institutions and their transition to modern ones but explains the nitty-gritty institutional detail that separates the pre-modern world from our own.

The difference between two extremely different eras can be measured in inches. Or, more accurately, metres.

In Allen's economic terms, the difference between pre-modern institutions—such as the practice of duelling, or the selling of public offices, or the private ownership and management of lighthouses, or public roads—and modern ones like libel courts, a professional public service based on exam performance, and public roads is a matter of measurement. More specifically, it's a difference in the costs of measuring the performance of these institutions against a stated goal. In other words: What does it take to know if an institution works?

Measuring such things costs something. In economic language these are "transaction costs":

Transaction costs are defined as those costs necessary to establish and maintain any system of rules and rights. If institutions are bundles of rules, then transaction costs are those of establishing and maintaining institutions. They are the costs of mitigating bad behavior.

In that insight, we grasp something about the nature of institutions. But clearly we mitigate bad behaviour differently these days. We no longer duel, for instance. So what changed?

Allen spends the bulk of the book running through a battery of examples that show the difficulty, in the pre-modern era, of measuring how a given public actor (members of the monarch's court, an admiral, a general, a tax collector) fulfills his function. The pre-modern era was one filled with variance. Nature played such a huge role in pre-modern life that it was difficult to ascertain whether a given public actor was behaving as he should (in the crown's interest) or whether he was shirking his duties and pursuing his own interest. In a world where two factors—man and nature—determined the outcome, it was difficult to assign blame.

Institutions that arose in the pre-modern era—as strange as they might seem to the modern eye—were actually structured in such a way as to mitigate bad behaviour and efficiently achieve the desired outcome of the crown. A monarch who wished for his public officers to work in the crown's interests rather than their private interest was to create a system of incentives that would allow the officer's interests to align with the crown's. Thus a complex series of practices arose—duelling, the purchase of massive estates, complex practices pertaining to marriage, social activities, and education—combined with the ability to earn a huge income off of public service.

Almost all of these practices seem completely bizarre to us today, but existed for centuries. They lasted because they worked. The "trust" engendered by such bizarre social practices as duelling with sabres to the death, or the throwing of lavish balls in country estates, combined with private incentives in the shape of incomes gained by public services through bribes, the buying and selling of offices, the offering of prize income after military victory—were "the Crown's two main institutional tools against improper behaviour on the part of its servants in a world where measurement of many daily, basic things was difficult and/or often close to meaningless."

Put differently, these institutions did the best they could with what they had. In economic language, Allen deems these institutions "constrained efficient." Or, as he notes:

In the Darwinian struggle between nations, firms, and individuals, societies are driven to find institutions that get the job done best under the circumstances faced at the time. . . . There may be other institutional arrangements that might be technically feasible, but under the circumstances, they are not economical.

The modern era brought with it the ability to, in a cost efficient way, reduce the variability of institutional life, and thus, made measurement much easier. The development of clocks, steam power, standard measures, and wide-scale reduction of disease through vaccines and public health allowed the public service to be structured in a different way. The development of new standardized accounting practices allowed the state more leeway in collecting taxes, and new means of communication allowed the state to collect information in ways previously unimagined. These changes came along with the Industrial Revolution, but it was only when these changes made their way into the institutional character of the west that the real revolution happened. The same is true across the board: our "widespread views on marriage, occupation, and social status; the practice of universal suffrage; and our sense of individualism, to name but a few, are all relatively recent institutional innovations" that derived from the institutional revolution.

Treating our Historical Neighbours as Ourselves

Allen's thesis is provocative and largely persuasive. It's persuasive in part because it attempts to treat our historical neighbours honestly. That is, it eschews Whiggish notions of history, which look down on the past as barbaric, and attempts to treat historical actors as humans with wills, making decisions as best they could under the constraints faced by them at the time. His serious treatment of institutions which have drawn disdain, ridicule, and disgust from other historians, is admirable, and indicative of a keen, patient, and fair mind—a model for anyone trying to understand the world of today, or of yesterday. This is furthered by his treatment at the end of the book of how such an approach to institutions might be more effective in working for international economic and social development is something which should be required reading for anyone working in economic development. Allen is exemplary in that he treats his historical neighbour as himself, and in his brief and tantalizing application of his study to current problems, he indicates that the same is possible in economic development in the present tense. The book is worth it for that alone.

Institutional Restraint and Institutional Outliers

Further, his recognition that the purpose of an institution is to mitigate bad behaviour, and that there are costs inherent in this purpose, is worth a closer look. While it will likely come as no surprise that a Calvinist like me sees the restraint of bad behaviour as inherent to certain institutions (especially the state), might we see similar factors at play in another core civil institution like marriage?

These days we speak a lot about the positive purposes of marriage. In fact, much of our dialogue about the purpose of marriage tends these days to revolve around three core centres, sometimes at once. Marriage, we're told, is an institution that enables two people to experience self-fulfillment, self-expression, or unity. Rarely do we speak of marriage as an institution that, when backed by public law, restrains some of our worst behaviours, and particularly the worst behaviours of men. And almost never do we hear that a stable marriage is the best institution in which to restrain the worst behaviour of children. These days we hear a lot from certain members of the chatterati—most of whom are wealthy—who wish to liberalize our attitudes toward sex and remove them from the restraints of marriage. And yet, when viewed from an economic perspective, marriage fits the definition Allen provides for institutions: "institutions are assumed to be wealth maximizing and chosen subject to transaction costs that arose in their context." Could it be that the relatively stable—and dare I say it, conservative—attitudes toward sex and marriage among the elite are indicative of a recognition of the strength of this institution?

In fact, when considered against the social and economic benefits of other family structures—particularly those among the poor—it seems that long-term investment in stable marriages on behalf of an individual might be the surest way to move into the next income bracket.

In fact, Allen notes that marriage is an outlier in the Institutional Revolution.

It is interesting that nothing during the Institutional Revolution or Industrial Revolution changed the role of nature with respect to families. Factories, urbanization, and standardization all altered the role of women in the workforce, but left the biological roles of men and women unchanged. As a result, the marriage institution remained unchanged as well. It was not until the middle of the 20th century, when technological innovations allowed some control over pregnancy and disease prevention, that the role of nature in sex and procreation was curtailed. It is not surprising that the nature of the family subsequently changed dramatically: marriage is now considered more of a "love"-based relationship; divorce is easier; grounds for divorce, children and spousal support, and property division are now legislated with rules that allow less discretion in family court; and marriage has begun to extend to same-sex partners.

Which brings me to pose a genuine question: Allen notes that "the full benefits of technological change [of the Industrial Revolution] could not be exploited until the full arrival of the modern institutions that came into being during the 19th century." Can we entertain the possibility that the reverse might also be true—that the full negative consequences of radical institutional change brought about by technological advances might not be experienced until many years have passed? Maybe we need some time before we're able to evaluate the Institutional Revolution.

While families and marriage are noted as late bloomers with respect to the Institutional Revolution, there is at least one outlier that, while I can't fault Allen for not studying (he is human, I presume), I wish he would have: the church.

This institution would be a unique case study. As noted, a key assumption for institutional economists is that "institutions are assumed to be wealth maximizing and chosen subject to transaction costs that arose in their context." Is the church an exception to this institutional rule?

While it is certainly true that the church has been guilty of acting according to this definition (certainly Allen's description of the patronage system in England suggests that the church there was neck deep in simony), and likely still is, does that accurately describe the church? While I would certainly welcome an airing of just how rotten the church has been in the past, I would also welcome a study of institutions—like many churches, and certainly like the brewmaster monastery of St. Sixtus—that don't seem to fit the institutional description. How might we understand the economic structures of institutions that have lasted for over 2000 years? I know that many will say that the church's institutional revolution happened before the period described by Allen, but what do we make of its relative stability since then?

In fact, Allen provides us with a hint. Late in the book he offers a slightly different definition:

An institution is a "system" of several factors that work together toward some type of goal. . . . One way to think about such a system is through the idea of economic property rights; that is, an institution is essentially a system, or collection of economic property rights. Within an institution, individuals are able to carry out certain decisions (to some extent) but not others. . . . The result of all these decisions is some type of outcome—a "regularity of behavior."

One can imagine a fruitful study of any number of institutions not marked by the goal of wealth maximization but nonetheless marked by a goal of mitigating bad behaviour (or, put differently, encouraging good behaviour): churches and trade unions seem especially ripe for such study.

Tranquility of Order

Toward the end of the book, Allen notes that "what truly remains the same over time is the tension between 'getting a job done' and â€˜doing it within an institutional framework.'" His book shows just how deep this tension is. Its chief value comes in showing that we cannot escape this tension, but must act; we must make choices within our current constraints to work. In concluding, it is important to note that such choices are not neutral, but will necessarily be guided by a variety of commitments. Allen notes that "all of these social factors . . . families, friendships, unions, business, constitutions, churches, tribes, social norms, mores, religious values . . . work together to make people behave in a certain way: it is hoped in order to create a community that is prosperous, regenerating, and competitive."

This opens the door to deeper questions, as institutional choices are not neutral. Those working to renew our social—our institutional—architecture will do well to keep this in mind, and work together to get people to work not only in a certain way, but a good way.

Topics: Institutions
