Thursday, July 12, 2012

Can democracies adapt?

While reading Tim Harford’s book, ‘Adapt’, I was thinking about the implications for democracy of the theme running through the book. I have been thinking a lot about democracy recently.

The theme is what Harford refers to as Palchinsky’s principles:
  1. Variation: seek out new ideas and experiment.
  2. Survivability: ensure that the scale of experiments is not so big that failure leads to catastrophe.
  3. Selection: seek feedback and learn from failures.

AdaptThe theme is also captured fairly well by the books sub-title: ‘Why success always starts with failure’.

Peter Palchinsky was a talented engineer in the Soviet Union. He was arrested by the secret police in 1928 and never seen again. His main ‘crime’ seems to have been that he refused to recant after he had been denounced for objecting to looming technological disasters.

Harford applies Palchinsky’s principles to a wide range of things, including the management of the war in Iraq by the US miltary, the events leading to the design of the Spitfire in England prior to World War 2, provision of foreign aid, climate change mitigation, financial meltdowns, corporate strategy and self-management.

One of the points that came through strongly to me is that even hierarchical military organizations need to learn strategy from their experiences in the field. I knew that was true of big business organizations, but I had not previously thought of armies as having to experiment in order to find the best approach to adopt in different conflicts. It seems that senior people in the US military were not aware of that either during much of their occupation of Iraq.

Harford’s discussion of the global financial crisis seems sensible. He suggests that the failure of experiments with sub-prime mortgages would not have led to a major financial crisis in the absence of tight coupling in financial markets via credit default swaps. These appeared to provide the banks with a greater margin of safety, but actually linked their fortunes closely to insurance companies. As a consequence, the sub-prime mortgage problem was transmitted from insurance companies to banks (and then to governments). The solution is obvious with hindsight - decouple the system so that banks are less likely to fail and the failure of individual banks does not lead to system failure. I would add that governments should adopt a ‘no bailouts’ policy and back that up with a requirement for banks to guarantee immediate and automatic transfer of ownership of all assets to depositors and bond holders if they (the banks) are unable to meet their interest or repayment obligations.

The points about self-management were not new to me. But it didn’t hurt to be reminded of the importance of trying new things in a context where failure is survivable - and of being prepared to learn from failure. It helps to remember that the failure of our experiments does not necessarily reflect on our competence unless we fail to learn from them.

The closest Tim Harford comes to discussing democracy in this book is his discussion of charter cities. In his version, governments establish the rules of a new city as an experiment to see if citizens and business want to live there.  If the experiment succeeds it can be repeated elsewhere. If it fails, that failure is survivable.
In reading Tim Harford’s book I was reminded of a claim by Timothy Ferris:
‘A liberal democracy in action is an endlessly changing mosaic of experiments, most of which partially or entirely fail’ .
The claim is made in his book, ‘The Science of Liberty’ (2010). In my discussion I suggested that Ferris’ view of liberal democracy, as akin to scientific experimentation, was a desirable ideal rather than a description of how democratic systems actually work. I suggested that elections seemed to be a reasonably effective way for citizens to avoid being governed by despots, to get rid of politicians who are obviously corrupt and to experiment with new policies. However, democracy departs from the scientific ideal because the democratic process is not good at ending policy experiments that partially fail. The most radical reforms rarely involve more than a tweaking of failing policy experiments.

If we look at democracy in terms of Palchinsky’s principles there are problems all over the place. There are at least two problems relating to willingness to experiment. First, there is often a strong bias in favour of the status quo because of loss aversion. If there is potential for any politically influential group to be disadvantaged by a policy experiment then it is unlikely to be conducted.  Second, there is often a reluctance to conduct experiments unless they involve the whole of a jurisdiction - questions of fairness are often perceived to be involved.

There are problems relating to survivability. Social experiments are often entered into by governments without adequate consideration of longer term implications for system survival. For example, welfare assistance that is granted when it seems to be affordable is often difficult to withdraw when economic circumstances change for the worse. Some European democracies are currently faced with survivability problems as a result of excessively ambitious social experimentation in the past.

There are also problems in seeking feedback and learning from failures. As noted above, the democratic process is not good at ending policy experiments that partially fail. This reflects two problems. First, governments are often reluctant to accept policy failure because it may have electoral consequences. Second, those who benefit from failing policy experiments are reluctant to see them end and often have the political clout to prevent this from happening.

So, can democracies learn to adapt? We have natural experiments that help us to answer that question. The older democracies have so far shown a capacity to adapt. They have been able to learn from some of their mistakes by adopting institutional innovations to improve the effectiveness of government and, to a lesser extent, to contain the growth of government responsibilities.

There is also potential for the democracies to learn from the success and mistakes of other democracies. For example, there is probably a lot to be learned from the modern experience of democracy in Greece, as well as from ancient history. A recent article by Steve Horwitz makes the point very well.

The idea of learning from the mistakes of others has more general relevance. It might even be worth adding to Palchinsky’s principles. However, it is probably harder to learn from mistakes made by others than to learn from your own mistakes. When my father told me that I should learn from his mistakes, as he often did, my response was that it would be much more fun to make my own mistakes. Looking back now, though, I don’t think my father actually made many mistakes that I could learn from.

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