The Lost Disequilibrium Method For Getting Better

Until 3 or 4 years ago it could be argued that modern societies are adaptive. Even then there were reasons to doubt this proposition. All kinds of impediments to adaptation remained from long ago or had been created over the course of the twentieth century. Among new sets of obstacles to adaptation are the consequences of (a) the apparently unstoppable growth of government, and (b) the tendency of education systems to distance themselves from one of their important functions, that of servicing the economy.

Yet there was hope after the cold war that the great ideological divide had been narrowed if not eliminated. You could reasonably be confident that capitalism was not seriously under threat. Come the next big economic crisis, the institutions would be forced to adjust to the market rather than the other way around.

Now the suspicion is growing that something larger and more disconcerting threatens. I won’t deal with the topic today, only as introduction. The old division of capitalism against socialism could be replaced by something worse; worse because it is more insidious and deceptive, as when someone treacherously passes himself off as a member of the family to which he does not belong.

In the minds of people there now coexist two forms of capitalism -- the one we are familiar with because it was described carefully in the classics, and the new type which, to give it an innocuous name, may be called ‘managed capitalism’ (a name suggesting mild contradiction in terms). Managed Capitalism defends the growth of government. Most astonishingly in the context of today’s economic crises, it has come to regard or portray economic growth -- hence prosperity -- almost entirely as a product of discretionary government monetary, fiscal, industrial, and welfare actions.

If the crisis has revealed one thing it is that Managed Capitalism dominates the agendas of politics in the advanced societies. Rightly or wrongly, politicians believe it impossible to win an election without providing guarantees that nothing much will change at all.

It is hard to argue against Managed Capitalism because it seems to be different from the original capitalism in degree rather than in substance. There was nothing really wrong with relaxing expectations in education or raising expectations in state welfare. Up to a point. Past that point, however, you suddenly are confronted with the existence of a system that is distinct as opposed to a mere variation on type. This new system has other more troubling ramifications beyond education and welfare, relating principally to the interests and lobbies sustaining a new-but-really-old-model of captured or rigged markets with state tutelage alongside distorted work incentives, all the while pretending to be capitalism.

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As a perhaps instructive indulgence in nostalgia I want to revisit the state of affairs that plausibly could still have been considered extant four years ago.

At the start of the 21st century, goes the story, there was the appearance of a happy paradox of stable instability or continuous discontinuity. The great changes of society and economy were becoming almost a simple routine. ‘Continuous discontinuity’ promised a world that accepts and learns to cope with the repeating adjustments regularly faced because of the intrinsic instabilities of modern market society. This condition was described in the past as “adaptive efficiency”, a “moving equilibrium” or “continual re-equilibration”. Douglass North said of a country like the United States, for example, there emerges “an ongoing condition in which the society continues to modify or create new institutions as problems evolve”.

This advanced stage in the development of human society contrasts usefully with three other conditions, which are not so much ‘stages’ as coexisting alternative modes of change which always are present -- or come and go -- in varying degrees of intensity.

1. Routine dis-equilibrium change

This is the happy paradox referred to above, the ideal high-level state of adaptation in an advanced market society. Using the compass of logic it follows the route map to capitalism described in the classics. Routine disequilibrium change means continual-discontinuity in institutional innovation. Capitalism stabilises in perpetual disequilibrium. In order that societies may preserve their comparative advantages in a world of relentless economic experimentation and periodic large-scale technological transformations, the institutions of society learn to adapt continually.

The most important institutional function is to readjust the regulation of markets as a requisite for sustaining a competitive and growing economy. Once sufficient institutional intelligence is created the state may play supportive roles, enhance competitiveness and the dynamism of social order; roles that it certainly could not have performed efficiently or dispassionately during earlier transitions to capitalism. It might, for example, collaborate with private enterprises in research and development, or spearhead best-practice methods for public and private delivery of key services in infrastructure, education, or health.

In the conditions of happy paradox, political and economic freedoms intensify and yet also institutionalise the processes of trial and error which facilitate adaptation throughout the social system. For example, the routine impersonality of state procedural norms induces ever-greater fluidity in decentralised interactions of organisational subsystems of the state, thereby increasing the disequilibrium pressures upon each subsystem to adapt efficiently.

This is an advanced hyper-routine of ‘continuous disequilibrium change’. It is not the same thing as the concurrent and prior pattern of slower evolution in a moving equilibrium:

2. Routine equilibrium change

Routine equilibrium change is the ‘incremental’ mode of change liked by conservatives and referred to earlier as "moving equilibrium". Until recently economic historians considered it to be the standard, ineluctable and universal process of history. A gradual aggregation of countless small scale changes will incrementally modify the institutional system. It is not organised change. Institutions of the now more advanced capitalist societies evolved over centuries through cumulative piecemeal experimentation, elimination, selection.

Only the competitive efficient institutions survived. The functions of these institutions were slowly learnt; they were not designed. Incremental change is punctuated only rarely, as during wars, when the changes are big or rapid enough to upset the equilibrium.

Progress may be interspersed by periods of static equilibrium resulting from the stalemates between opposing interests or ideologies, or strong cultural resistance to change. Many scholars believe behaviour in incrementally evolving institutions is heavily weighted by informal rules of conduct handed down from previous generations; informal rules that may have congealed as formal institutions, but which constrain future change.

As pointed out in a previous post, this viewpoint is prone to exaggerate or confuse cultural constraints with what in fact are ‘only’ political constraints.

A valid point is that in the societies that pioneered transitions to capitalism, the legal, administrative, and political institutions evolved because there was – for quite long periods of time – sufficient political and intellectual freedom to learn through trial and error.

3. External disequilibrium change

External disequilibrium change is the result of discontinuous pressure emanating outside the nation territory, which reshapes the domestic environments where capitalist transition occurs. The contemporary transition is different from original evolutions of capitalism since it occurs in a global environment where capitalism already exists in advanced societies.

Obviously, then, this form of change is most likely to be encountered in weaker developing states, though it can take very undesirable forms. Reforms imposed by outsiders create dependency and are eventually regarded as illegitimate. Commitments by outsiders are rarely maintained. Compliance with external conditionality is similarly difficult to achieve or sustain, though that is not to say it is not often a necessary element of debt restructuring.

It is better, when possible, to generate change internally. Nevertheless the good reason for regarding capitalism as the world’s “engine of growth and development” is simply that it is continually revolutionising technologies and the economic conditions of production, always exerting pressures upon institutions to adjust to economic innovations. On a global scale these forces impact on the pattern and pace of institutional change in all developing countries that maintain even partly open economies.

The external force is systematic in the sense that it is continuous or repeats regularly. In the past, mercantilism, colonialism, and imperialism might have qualified for inclusion in this category. Over long periods of time they exerted consistent external pressure for radical disequilibrium change in large parts of the global periphery, for better or worse.

4. Internal disequilibrium change

This category is of greatest interest to developing countries attempting the transition to capitalism. I am starting now to think it may be appropriate also for advanced societies which lost their way when they deviated self-destructively from the classical capitalist path. In this category of change, the quality and appeal of the classical idea of capitalism becomes decisive for motivating the direction of change, i.e. ideology matters.

Internal disequilibrium change is autonomous policy innovation in the domestic context. Endogenous initiatives resolve endogenous development problems. In most cases, an internal crisis creates the opportunity to construct new institutions or reform existing ones. The typical pattern is regularly repeating crisis-induced policy sequences associated with terribly familiar development reversals caused by populism and state economic activism.

Key (unavoidable though sometimes odious) conditions of change in this category are political leadership by exceptional individuals, along with temporary shelters from political competition. Other favourable conditions include knowledge of capitalism, or at least firm commitments to liberalise markets and modernise institutional subsystems by “rapid small steps”. Ideally, the reforms will be designed to achieve regulatory competencies that rest primarily on non-discretionary rule-of-law. A feasible aim is to dramatically speed-up this basic movement of history toward market freedom and state impersonality, a process which progressed only slowly by incremental evolution in the advanced societies.

In this category, policymakers continually innovate and fine-tune reforms in response to concurrent changes in internal and external environments. It is a pressured hothouse condition of fast-learning with disproportionalities, tensions, conflicts, bottlenecks.

Conclusion:

You might well have expected around the year 2000 that advanced societies had deeply internalised the routine through which failed institutions as well as failed economic units are eliminated. It would be reasonable to presume that development reaches a certain indefinable threshold within a social system once it has run through several cycles of crisis. Eventually, in that ideal and potentially real teleology, discontinuous and cathartic creative destruction gives way to a calmer situation in which smaller-scale innovations maintain the modern disequilibrium routine of adaptation. It becomes the normal pattern of highly advanced capitalist society. My impression, regretfully, is that it did not occur. In the present crisis, powerful interest-groups are blocking the mildest creative destruction.

If a development toward the happy paradox of routine dis-equilibrium change was interrupted, was it because continuous change in economic and institutional life is too disconcerting? Are the voters who refuse to tolerate tough economic reforms just another of the interest groups? People often regard the continual sometimes painful adaptation as unsustainable and anarchic rather than a permanent condition of progress and order.

Once lost, the adaptation momentum -- it should have been valued as rare treasure -- is difficult to recover. If it has indeed been lost, numerous countries in the western world are heading for a more painful process in the 4th category -- internal disequilibrium change. Later, as day follows night, they will try for 1st again.

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