Why Western Institutions are Failing and What to do about it.
or — How understanding “institutional sclerosis” is the key to fixing our ailing governments.
This is essay 1 of 6 for 1729 Writers Cohort #1. Apply to 1729 today at 1729.com.
If you follow Peter Thiel, you’ve heard him use the term “sclerotic institutions” to describe the declining performance of Western governments…
Right as Russia was tragically invading Ukraine earlier this week, members of 1729 were logging on to hear Balaji give a lecture on Decentralized Defense. In the lecture, he explored evidence suggesting the United States military is declining in power, and may not be as strong as they are commonly portrayed in the movies. As this decline in capability dawns on our adversaries, there will be an increase in disorder.
As I listened to the lecture, I pondered the decline of so many other American institutions, and thought about how Peter Thiel is always addressing this topic using the term sclerotic institutions. But what the hell were sclerotic institutions anyway? Since Thiel is a genius and all, I always just nod along when he says it, never really understanding what it means.
I decided to investigate and discovered a concept that I believe has massive explanatory power to describe what is going wrong all over the West, and what can be done about it.
Before we dive in, a note of context.
We in the US are a Great Empire, and we are in decline (see below)
The stability and security we wish for ourselves and the world is not possible until we understand the reasons for this decline, address them, and finally stabilize and reverse the trend. This is axiomatic.
Books like Why Nations Fail show that the functioning of our institutions is the key driver of prosperity and hence security and opportunity. If we recognize ourselves as being in decline, our institutions are were we should turn our attention.
What is Institutional Sclerosis?
The medical definition of Sclerosis is defined as “Abnormal hardening of the body tissue.” Institutional Sclerosis, then, according to inventor Mancur Olson, is when when:
‘In liberal democracies experiencing continuity and stability, interest groups form over time and grow to exact rents, becoming vested. The accumulation of vested interests and rent-seekers ultimately slows the ability of a government to reform, adapt, and secure perfectly competitive markets… This sclerosis saps an economy’s dynamism and lowers growth rates.
Just like diabetes and heart disease, sclerotic institutions are a disease of affluence — that’s why it’s so tricky. It’s brought on by “continuity and stability.” But the special interests that form and grow and exact more and more rents are never satisfied. And then when history starts to move and you require adaptability, you come to find that your institutions, once responsive, are ossified, stuck, hardened. They can only do the same thing they’ve been doing, and their job has subtly shifted through the years from serving the populous to serving the interest groups.
Exhibit A: Obamacare
Thiel also happened to write the forward to Ross Douthat’s 2020 book The Decadent Society. The book dedicates a chapter to Institutional Sclerosis, listing it as one of the leading causes of American decline.
“[one reason why] Obamacare opposition became so fierce, and the debate so toxic, was that the health care system as it exists is [like] government as a whole: a huge sprawl of client populations and powerful interest groups, all of which have a strong financial stake in the existing system, and all of which have spent decades building up the lobbying shops and inner-ring knowledge required to either frustrate or redirect reform… These groups start with the corporate actors that reformers tend to describe as “special interests,” such as drug manufacturers and insurance companies — which is why there was no way for the health care reform to advance without the Obama White House buying off Pfizer and appeasing Aetna.”
Douthat concedes that the ACA did expand coverage, but it didn’t solve any of the underlying cost issues.
What Douthat describes is sclerosis in a nutshell. Our institutions are so hardened by the pressures put on them by special interests that any attempt to restructure them is such a byzantine nightmare, and meet so much resistance, that few dare to even suggest it. Barack Obama’s healthcare struggle, pursued with full vigor, a massive approval rating and a supermajority in the senate was one of the most valiant efforts at fundamental reform in recent memory. It was billed as a panacea. In the end, coverage was slightly expanded, but costs went up, and service was worse than before.
Exhibit B- The bank bailouts
Sclerosis isn’t just happening at the level of individual institutions, but at the level of legislation and policy making.
“the Obama White House’s technocrats, elected in the aftermath of a disaster created by private interests too intertwined with the public interest to be allowed to fail, presided over a further consolidation of the public and the private, a stronger Washington–Wall Street symbiosis in which banks and corporations were protected but home owners were left to suffer, and not a single important person went to jail.”
In a word, sclerotic institutions become depraved. The consequence to banks for creating a once in a generation financial disaster was bailouts and a protected ‘too big to fail’ status with the federal government. In a sclerotic system, the interest groups always get the spoils, even if they just got done creating a calamity.
So, how do we address it?
“In liberal democracies with young institutions, by contrast, competition remains perfect and natural economic dynamism and creative destruction ensue, generating high growth.”
Olson goes on to tell us that competition and creative destruction will get us ‘high growth,’ but more than that, they will get us institutions that function, adapt and respond to citizen needs.
Solution 1 — Competition
Both the Democratic and Republican parties are increasingly disfavored and yet they stay safely in power in perpetuity. Why? They have no actual competition. Sure, they put on a ceremonial tele-drama every four years where they hope they can scare you away from the other side, and every so often things do go off script. But experience shows us that whoever wins, we will become frustrated and exhausted by them soon, and the previous loser will be reinstated to power not exactly because we want them, but just by default.
Only in lieu of actual competition could we be convinced to accept our present set of options, which Americans are clearly trying to escape.
How to reinstate competition — change how we vote
A fantastic strategy to reintroduce competition into the political sphere is laid out in the book The Politics Industry. The book’s tag line is “Politics isn’t broken, it’s fixed.” In other words, it’s functioning exactly as it’s intended to: providing money, tax benefits and preferred regulation back to the special interests.
According to authors Katherine Gehl and Michael Porter, the only way to address this problem is to innovate the way we vote using what they call Final-Five voting. It consists of two subtle but essential changes: Open Primaries and Ranked Choice Voting.
Open Primaries
In Open Pirmaries, there are no more party -specific ballots. Instead, all ballots are the same and contain candidates from all parties. Citizens vote for whoever they want and the top five winners from the primary go on to the general.
This doesn’t just offer more choice, but gives a major advantage to moderate candidates that can pull from both sides. This is a total polarity shift from the present situation, where candidates are often forced to appeal to the party’s extreme fringe.
Ranked Choice Voting
Ranked choice voting sounds confusing at first, but once you get it it’s very simple and intuitive.
Just like Open Primaries, with RCV, moderate candidates who have a major advantage. With this one simple change and the incentives it brings with it, American politics could be significantly depolarized overnight. And with more options we can start electing people who truly appeal to us, rather than an A/B choice where we’re just voting against the other candidate
Another example of how to introduce competition into politics is Andrew Yang’s Forward Party. How we introduce competition into the present, ossified duopoly it is important, but what is more important at this stage is that we recognize it as as a precondition to an having functional institutions.
Solution 2 — Creative Destruction
Creative destruction is one of the most important drivers of a functioning capitalistic society.
According to Joseph Schumpeter, who popularized the theory in his 1942 book Capitalism, Socialism and Democracy, Creative Destruction is:
“the process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
Creative destruction is how Amazon beat Sears, and how Tesla may one day beat GM. More efficient models displace the old, causing a disturbance in the status quo, but providing an advantage to the consumer and the economy as a whole.
Films like “Who Killed the Electric Car” show us how our institutions, driven by special interests, can function in the exact opposite way from creative destruction. According to the film, electric cars were being successfully created in the mid 90’s, but then were killed by special interests that didn’t want new technology to get in the way of oil consumption. The result was nearly twenty years of delay before electric cars came back around to the public thanks in large part to Elon Musk. Instead of creative destruction we got something like entropic destruction: Special interests using the system to destroy innovation in order to protect their dominance, leaving us in a state of slow decay.
Functional, dynamic systems must embrace change. This requires directly taking on special interests who see it as their responsibility to keep things the same for their advantage.
Conclusion
Sclerotic Institutions persist and get worse because our government is insulated from the market forces of competition and creative destruction that force discipline and consumer satisfaction on the private sector.
To address and fight institutional sclerosis, I predict the next stage of institutional evolution will be to introduce these market forces into our institutions so that they compete for the approval of the public.
In the end, public institutions need to be responsive to citizens, not special interests. When we learn to push the balance of power back toward the citizen, so citizens can make their priorities known and hold those in power accountable, institutional effectiveness will follow.
Matt Harder runs the civic engagement firm Civic Trust, where he guides cities in re-building their civic infrastructure by helping residents, civic organizations, and local government co-create public projects. He is also a passionate Bitcoiner. Follow him on Twitter.
