Living within Rules:
Why Only Limited Governments Can Be Resilient, and
Only Polycentric Governments Can Be Limited
Vlad Tarko
George Mason University, Economics Department

Basic idea

Overview
• What is institutional resilience?
• What is institutional complexity?
• The nested nature of social order
• Institutional design: incentive and
knowledge problems
• Polycentricity

Overview
• What is institutional resilience?
• What is institutional complexity?
• The nested nature of social order
• Institutional design: incentive and
knowledge problems
• Polycentricity

Institutional resilience
• The ability of a social system (society,
community, organization) to react and
adapt to abrupt challenges (internal or
external) and to avoid gradually drifting
along destructive slippery slopes.

Resilience from an equilibrium
perspective
• Absorption capacity
– The size of the shock with which the system
can cope
• Speed of recovery
– How fast the system gets back to normal after
a shock

Resilience from a non-equilibrium
perspective
• Adaptability
– Change is
• unavoidable
• necessary
– Uncertainty as a resource
• Avoiding slippery slopes towards
“catastrophic thresholds”
– E.g.
• Mancur Olson’s Rise and Decline of Nations
• Jared Diamond’s Collapse

Overview
• What is institutional resilience?
• What is institutional complexity?
• The nested nature of social order
• Institutional design: incentive and
knowledge problems
• Polycentricity

Complexity is non-linear
• Miller & Page (2007) Complex Adaptive
Systems: An Introduction to
Computational Models of Social Life:
– “Complexity arises when the dependencies
among the elements become important. In
such a system, removing one such element
destroys system behavior to an extent that
goes well beyond what is embodied by the
particular element that is removed.”

What is social complexity
• The network that matters is not made of
actual, flesh-and-blood people
• What matters: the network of institutions
• Eliminating individual people rarely
matters for the social system as a whole
• Missing institutions matter

The fundamental building block of
institutional reality
• Searle’s role assignment formula
x has institutional role R in context C
• Institutional role (position, “status function”)
= bundle of rights and obligations
• How institutional complexity emerges:
– x and C can be previously defined roles or
functions of previously defined roles

Rules and norms

Political power

Overview
• What is institutional resilience?
• What is institutional complexity?
• The nested nature of social order
• Institutional design: incentive and
knowledge problems
• Polycentricity

Self-similarity

IAD, step 1

IAD, step 2

IAD, step 3

IAD, step 4

Institutional design: Incentive and
knowledge problems
• IAD framework is mainly a descriptive
scheme – useful for understanding how
institutional change occurs (Ostorm 2008).
• The redesign is done by the participants
themselves
– who often have vested interests about the
outcomes.
• The redesign of the institutional factors is not
done by
– impartial and benevolent agents
– omniscient agents

Overview
• What is institutional resilience?
• What is institutional complexity?
• The nested nature of social order
• Institutional design: incentive and
knowledge problems
• Polycentricity

Institutional design
Knowledge problem

What drives social complexity up?
• Ideally, institutions as devices for preventing
social problems
– “if people can rely on others to fulfill certain roles,
then their expectations are more likely to be
coordinated”; “institutions convey knowledge, in the
sense that the routine courses of action they embody
are efficient adaptations to the environment”
(O’Driscoll & Rizz0 1985, The Economics of Time and
Ignorance)
– “Complex societies are problem-solving
organizations, in which more parts, different kinds of
parts, more social differentiation, more inequality,
and more kinds of centralization and control emerge
as circumstances require” (Tainter 1988, The Collapse
of Complex Societies)

Trade-off between efficiency and
resilience
• Miller & Page (2007):
– “Adaptive systems have to deal with the tension
between the benefits of achieving precise
behavior and the cost of increased system
fragility”
• Optimal systems are less robust, Carlson &
Doyle (1999), Highly Optimized Tolerance
(HOT):
– “Optimizing yield will cause the design to
concentrate protective resources where the risk of
failures are high, and to allow for the possibility of
large rare events elsewhere”

Why do complex social systems
fail?
• Constanza, Low, Ostrom & Wilson (2001)
Institutions, Ecosystems, and Sustainability
– Missing or failed institutions
– Scale mismatches
• Missing Connections
• Incorrect Scale of Information
• Rational social design is very hard.
• Alternative: a social mechanism for growing
institutions “organically”, by trial and error.

Institutional design
Incentive problem

Rules designed to benefit designers
• Rent-seeking
• Regulatory capture
• Credible commitment problem
• Endurance of constitutions
– Easier to amend
• Lasts longer
• Less constraining
– Harder to amend
• It is replaced entirely –> even less credible

Overview
• What is institutional resilience?
• What is institutional complexity?
• The nested nature of social order
• Institutional design: incentive and
knowledge problems
• Polycentricity

What is polycentricity
• Aligica & Tarko (2012)
– a multiplicity of decision centers acting
independently but under the constraints of
– an over-arching set of norms and rules which
create the conditions for
– an emergent outcome to occur via a bottom-
up evolutionary (competitive) process
• Ostrom (2005)
– The decision centers can be at different scales
(e.g. federalism)

Effects of polycentricity: knowledge
problem
• Experimentation & imitation
– Trial and error
– Rejection of “one size fits all” and “blueprint
thinking”
– Cultural evolution of institutions
• When failures occur:
– Large scale -> reliance on local governance
– Small scale -> help from higher level
organization

Effects of polycentricity: Incentive
problem
• Subsidiarity:
– all problems must be addressed at the most
local level possible – that avoids free-riding
problems
– Free exit gets cheaper => increased pressure
on local authorities => less abuse of arbitrary
power
• Universal rights recognized and enforced
at larger scale:
– Prevention of “local tyrannies”

Resilience and efficiency
• Resilience stems from limiting abuses of
power (i.e. limited government)
– Replacing highly personalized institutional roles
with general institutional rules
– Polycentricity – especially free exit – forces the
adoption of rules
• Making rules efficient and flexible:
– Institutional diversity and competition instead of
flexibility by unlimited authority
– Polycentricity – experimentation & imitation –
facilitates the discovery of good rules and
adaptability to new conditions

Rational rent-seeking VS free-floating
rationales
• Persons with authority can’t really solve the
knowledge problem
– The world is too complex to be managed rationally
– Only hope: relying on “wisdom without reflection”
(Burke), “organic institutions” (Menger), “free-floating
rationales” (Dennett).
• Free-floating rationales serve no one person or
group in a predictable fashion => tension with
individual and group interests and their desire to
design the institutions that best serve them.
• The system is resilient only to the extent that free-
floating rationales win over special interests’
attempts at rational design.
• This happens only in polycentric systems.