Institutional Failure as Surprise

by | April 24, 2018

This is an excerpt from the draft of my upcoming book on great founder theory. Learn more here.

Discerning whether an institution is near failure is a difficult epistemic problem. There are many outwardly visible pieces of institutions that do not reflect their actual health. Before the 1929 collapse of financial institutions, naive observers were optimistic on the basis of soaring stock prices. Even after the Black Tuesday stock market crash, most observers expected a normal recession and recovery. Instead, the system continued to deteriorate: bank failures wiped out savings, the gold standard was abandoned internationally, and the Great Depression ensued.

Institutions often proceduralize tasks; that is, they create sets of instructions for completing tasks. This process yields bureaucracies: bureaucratization is proceduralization. If you’ve ever worked in or with an institution of some size, you’ve encountered proceduralization. Getting a driver’s license at the DMV is a great example: you must follow a rigid set of instructions to do so.

In many organizations, particularly mature ones, a significant portion of tasks are handled by automated systems. Such systems can persist, and even fulfill their function, while the core institution itself is failing. Decay is in fact the rule: the maintenance of old institutional abilities is difficult, and the growth of new ones is rare. Therefore, if one wants to determine whether an institution is failing, one must discover which features of an institution indicate the current health of the core organization itself, while carefully distinguishing these from features reflective of past health, or support from outside institutions.

From these signs, it’s possible to discover whether an institution has the ability to face new threats, or is merely trudging through a slow process of decay. If an institution is unable to adapt to meet new challenges, it will lose again and again. Enduring defeat can only last for so long, no matter how large or well-established the retreating organization. Eventually, the inability to win dooms all institutions.

Robots outlive their makers

The DMV’s procedures are annoying, but they get the job done — millions of people have gotten driver’s licenses. Proceduralization delivers very effective results at the cost of increased fragility. Human intelligence is a general process capable of solving problems. Applying your mind to any given task produces an approximate, context-appropriate solution. You can greatly improve this solution by adapting it more and more to the particular context in which it is used.

However, as you continue to adapt your solution to fit the case at hand, it becomes nearly impossible to also have the solution remain generalizable, let alone contain the full set of instructions necessary to fit it to all situations. As a result, proceduralization tends to sacrifice much of the adaptability and context fit that intelligence can bring to particular cases.

However, as you adapt your solution to fit the case at hand, it is nearly impossible to also have the solution remain generalizable, let alone contain the full set of instructions necessary to fit it to all situations. As a result, proceduralization tends to sacrifice much of the adaptability and context fit that intelligence can bring to particular cases.

The basic structure of proceduralized systems makes it difficult for the people working inside of them to deviate in order to adapt to a new context, even when doing so would be beneficial. Proceduralization then always increases employee cost for altering an organization. The cost induced by proceduralization is the main obstacle to an organization adapting. The only comparable obstacle is lack of employee knowledge of how to adapt.

A basic building block of bureaucracy is the creation of incentive and responsibility schemes and that induce many people to reliably follow a procedure of some kind. This kind of incentive-backed proceduralization pervades much of the modern workplace and institutional landscape. Because it is in the basic nature of such institutions to motivate people with incentives and constraints, it is exceedingly difficult to change or adapt them from the inside, lest you incur punishment or fall behind your less innovative co-workers.

One specific aspect of this incentive structure further solidifies the un-adaptability of bureaucracies: knowledge of the principles on which the institutions were built will inevitably fade, because the employees don’t need to understand these principles in order to complete their tasks. Understanding beyond what is needed to play your role is not necessarily penalized, but it certainly isn’t rewarded.

Over time, this incentive structure will result in a bureaucracy with no remaining understanding of the principles which generated it. Once these mental models are gone, it becomes difficult to change the system or adapt the procedures to new contexts. To make matters worse, the institutional stasis established through fixed incentive structures and an absence of principled knowledge, inevitably decays over time. Systems of incentives often do not incentivize their own preservation. Vladimir Lenin quipped that capitalists would sell the rope used to hang them, and he was correct that nothing within the capitalist system incentivized working against the revolution. That systems of incentives aren’t self-preserving results in a kind of erosion, as resources are extracted and minor things changed here and there at the expense of the institution’s functionality.

Sometimes, systems succeed in partially incentivizing their own preservation, which extends their life; however, even then they always align incentives imperfectly. As a result, some parts of the system bloat over time, rendering it unfit for its original function.

In computer programming, there is a kind of program called a quine, defined as a program that takes no input and as its output produces its own source code, replicating the code perfectly. There is no such thing as an institutional quine, a self-contained institution that with no inputs perfectly replicates itself. A system of procedures tied to a system of incentives requires active maintenance in order to perform the task it was designed to perform, and to counteract the inevitable decay that ensues as individuals fight to turn the organization’s resources to their own ends.

This is the fundamental problem of bureaucracy: a system devoid of human judgement and oversight results in constant politicking, and constant politicking results in decay. This decay produces something worse than just an unadaptable system: an unadaptable system that fails to perform even its original limited function.

It is best to think of such institutions as machines with human parts. They can be constructed and designed by humans but can also easily outlast the humans that created them, even with someone no longer at the helm. In this situation, they will not automatically fail, but will shamble along less and less effectively in their preordained direction, sometimes continuing to accumulate material wealth or even ever greater numbers of employees. Their agility and adaptability will vanish, however, as too will their ability to achieve their original goals.

In this way, a powerful institution can be brought down by changing circumstances or even external attacks which it cannot adapt to. For example, major newspapers are still struggling to adapt to the internet and the subsequent rise of online news. They have not recovered their previous profitability or effectiveness at shaping opinion.

The proceduralized actions such rigidified institutions perform, even if they are functioning well and not diminished by the usual transformations and distortions that arise in bureaucracies, are powerful but context dependent. As such, the institution as a whole is powerful but context dependent. Those individuals that generate such institutions, on the other hand, are powerful and not context dependent.

Leaning on the outside

Some automated systems are not truly part of a given institution at all, but rather an interface with an outside institution.

An interesting example might be the simple observation that a given institution appears to be keeping the lights on in the office. To do so requires that the members of the organization work in a well-maintained building that is connected to a functioning power grid, while keeping up with their electricity bill payments. The building can be maintained by an appropriate service provider.

That the provider is doing their job is a sign of the health of the provider, not the organization hiring them. That the power grid is functional also doesn’t reflect the health of the organization under consideration, unless it is the city or national government. That the payments are being made is in itself a weak or moderately strong sign depending on the size of the organization. Generally if the institution is a very large or established one, it is a weaker sign. When large entities go bankrupt, they keep the lights on until the end.

Thinking about the example, you should generalize it to include all the relevant ways in which an institution relies on others to maintain its appearance. If it is using simple contracts to acquire visible resources (such as reliable lighting), do not consider these elements signs of competence beyond whatever competence is needed to acquire adequate funding.

This insight is especially important, because there are several types of institutions that will reliably have enough funding until their very end. Notable examples are large companies and government institutions. In these cases, signs like reliable electricity provide essentially zero evidence of organizational flourishing.

If the institution is relying on non-monetary agreements, such as perhaps other institutions being legally required to provide them with a relevant service, you should ask yourself whether the organization could oppose an attack on these services, or at the very least survive, without outside help. Furthermore, could the institution maneuver itself today into having such guarantees, if it didn’t already have them? If the answer is no, this means that the institution has lost an important ability: it can no longer negotiate new deals. That the old deal continues to endure is not strong evidence that the ability to create or even permanently secure the resources on which the institution depends endures.

When seeking signs of institutional failure, you must carefully filter out evidence that primarily indicates the success of other organizations, making sure to account for those success-independent funding sources or unstable contracts that the institution in question would be unable to re-establish.

Official trappings are easy to maintain

Under conditions of widespread institutional dysfunction, formal trappings can be disconnected from the core competence with which they are supposedly associated. Sometimes they can even begin to anti-correlate. But assuming the institution in question is not in such a dysfunctional context, the formal trappings of an organization actually do indicate competence.

A crucial consideration is that trappings are in general easier to maintain than to set up anew. It is tempting to equate the difficulty of setting up a new, well-positioned organization with that of keeping an existing organization well-positioned, but in reality it is much more difficult to do the former than the latter. Naive intuitions are easily misled on this point. It is much easier to sail a ship, even in choppy seas, than to build a new one from scratch.

When labor unions were established in the early 20th century, they organized striking workers to endure near-starvation levels of hardship and violent reprisals from factory owners, and eventually achieved a stable position. Now, unions maintain that position with bureaucratic and legalistic tactics, and strikes are resolved with contracts instead of truncheons and pipe bombs.

Reputation is a crucial resource, and its dynamics show how difficult it is to create a new well positioned organization. Reputations generally persist, unless spoiled. An easy way to avoid spoiling a reputation is by never failing, and an easy way to never visibly fail is to never undertake a task. In this way, an institution that is notably inactive and perhaps incapable of new or effective action can maintain its prestige long after demonstrations of the power, ability, or knowledge that earned this prestige in the first place are beyond its reach. NASA relies heavily on the reputation it earned from the moon landings. This mostly persists today, even though the last manned moon landing was in 1972.

In many human endeavors, the most legibly valuable thing you can bring with you is a track record of past achievement. Sometimes you are only allowed entry into such a domain if you already have a track record. Enforced barriers to entry based on assessment of track record sometimes arise naturally and rationally, as there are often no good alternative signs with which to judge relevant competence. Other times they are the result of cartel-like rent seeking, intended to protect incumbents.

Certain permits have harsh entry conditions but lax inspection for compliance. When this is the case, the barriers to entry very likely exist for their own sake and not as a form of quality control. A regulatory environment that relies on track record is the most direct way to protect incumbent organizations from competition. Once such credentials are gained, they are hard to lose. These formal trappings show that the organization was capable of acquiring the permits at the time of acquisition, but do not necessarily say anything about present capabilities.

Unless recent, past success should not be taken as evidence of an organization’s future endurance.

Fighting institutions do not fail

An organization engaged in ongoing conflict is surprisingly likely to be healthy, simply because surviving attacks requires some degree of health. Under conditions of real opposition, even retaining past resources such as prestige should be understood as a sign of activity.

After all, should opposition be serious in pursuing conflict, it will attempt to disrupt, attack, sabotage, or disable crucial individuals and automated processes. It will also attempt to wear out, destroy, or steal notable accumulated resources.

If the institution does not degrade under such pressure, there is someone repairing the damage, and that someone has to be effectively working within the reality of the institution under repair. There are two important considerations that must be considered before accepting this read in a given case, however: ‘How real is the conflict?’ and ‘How big is the besieged organization?’

How real is the conflict?

Not all apparent opposition is real opposition, as is frequently the case with cartels. Cartels are vehicles for reaping some of the benefits of a monopoly, without being a single organization. Some are like OPEC, the alliance of oil exporting countries, and overtly attempt to fix prices along their shared interests. However, many cartels have an incentive to disguise their coordination.

A recent example was Apple, Intel, Adobe, and Google making a secret agreement amongst themselves to not poach each other’s employees by offering them jobs. This arrangement gave all of these companies a better negotiating position with their skilled engineers, enabling the companies to pay them lower salaries. This was ultimately illegal: the state of California doesn’t allow non-compete clauses in company contracts.

In such circumstances it is an asset rather than a liability for a set of companies if the public or crucial decision makers are under the impression that the companies are in conflict. As the true, non-competitive nature of the arrangement came to light, the offending companies were sued and eventually had to settle, paying $415 million dollars in damages.

Sometimes, the defeat of competitors isn’t desirable for a given company or organization. The appearance of competition or opposition can be good optics. In Communist Yugoslavia, there existed toothless parties such as the Christian Socialists that were bound in a permanent coalition with the League of Communists of Yugoslavia. While the reality of this arrangement was that of a one-party state, the form was that of a multiparty state. The fig leaf of being a democratic society was preserved, at least internally. To eliminate these toothless parties would not be advantageous to the ruling party.

If the defeat of the other side isn’t desired, then what appear to be attacks and counter-attacks can be, in reality, quite benign. Beyond politics, with its staged political debates and occasional show trials, professional wrestling made an industry of producing performative feuds between its wrestlers for entertainment value. The pretense was that the industry was a sport; the reality was that it was show business. They even had an established term for keeping up the pretense that the feuds were real: kayfabe. Since such long standing fake conflicts can be proceduralized; they don’t constitute strong evidence of an institution’s vitality. Fake conflicts don’t require much adaptability.

How big is the besieged organization?

A very large institution can survive real opposition, even if its organization is mostly hollow. It absorbs organizational damage, never truly recovering, but still persisting. As it is unlikely to simply outlast a determined opponent, in order to survive it must have some automated defense mechanism in place that can permanently disable or deter opposition.

A security organization’s ability to launch investigations that find compromising material on their opponent is an example of this phenomenon. This ability is part of their core functionality and can easily be deployed. Such automated counter-attacks will not be innovative, but rather merely will exercise one of the many organs that the organization developed long ago.

Despite being more vulnerable to destruction by greater powers, organizations that are fighting, self-contained, and young are far likelier to be active. Where do we see these today? Overall, large and proceduralized institutions dominate the landscape in industry after industry. Even in Silicon Valley, companies like Yahoo and Facebook are best understood as mature media companies rather than young upstarts.

Prestige outlives institutional health

Peaceful, integrated, and long-lasting institutions are often seen as healthy and likely to endure. However, it is precisely these conditions that allow their gradual hollowing-out and descent into dysfunction to remain unnoticed.

The ancient nature of such institutions might signify the presence of a fully-automated machine. Their integration with the rest of society and other institutions can signal that they are getting by on the health of their environment, rather than their own residual functionality (remember, functional institutions subsidize all others). And finally, a lack of serious conflict means that their current resources and positions aren’t honest signals of their current abilities. The difficulty of assessing these factors makes it clear that organizational failure often comes as surprise not just to outsiders, but to insiders as well.