Institutions for complex networks
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Group size in social experiments are typically limited to no more than 5 to 12 whereas the focus of liberalization policy is at national economies of populations in the millions. Such complex structures and feedback dynamics influence emergent political and economic phenomena (Easley, 2010). The dynamics of social networks amplify the effects of the institutions that govern the rules of interaction and exchange. These networks are capable of scaling inequitable consequences of institutions that reward selfish actors and amplify their ability to exclude others and draw advantage to themselves. Conversely it is also possible that these dynamics could also amplify egalitarian institutions and norms that moderate extremes and promote equity.
The emergent outcomes of economy-wide effects are the result of local interaction dynamics of reciprocity, association and conformity occurring within groups, the structure of how these groups organize themselves into larger networks and the institutions governing interactions at multiple scales. If there are different dynamics on smaller group size than larger ones this would be an important consideration for institution design.
It’s not clear from the Heritage Foundation report that claims are conditioned on group size, and whether the skepticism of public institutions of liberalization is directed at their democratic structure, their size or the combination of both. Group size based on informal associations at the smallest unit has been studied by the anthropologist Robin Dunbar, who established a relationship between the size of the neocortex and the group size of grooming cliques in primates.
For humans he determined that 150 was the upper limit of informal association group size and it is known as “Dunbar’s number”. His hypothesis was that for social primates physical constraints of neural connectivity, tissue density set limits on the number of different permutations of cross-relationships in a group that an individual could keep track of (Zhou, Dunbar, 2005). He hypothesized that the strength of informal associations alone would start to break down for group sizes larger than this limit and would fissure absent any other force or institutional design (Zhou, Dunbar, 2005). So the local dynamics in groups of less than 150 may be important for the informal association mechanisms in norm setting and cooperation and more formal institutions may be needed to coordinate behavior at larger scales.
Institution design for small and medium sized groups just below and above the Dunbar limit for a special kind of problem resembling Hardin’s tragedy of the commons “common pool resource” (CPR) was the motivation of Elinor Ostrom’s work “Governing the Commons” (Ostrom, 1990). These CPR cases were shortlisted based on specific features of renewable, scarce resources shared by a small community size of <15,000 and a few other conditions (Ostrom, 1990). Ostrom found that stable institutional forms which have persisted over long periods of time include features that incorporate cooperative and competitive dynamics and utilize both formal and informal controls. In contrast to the biological insights of individuals from anthropology, endocrinology and neuroscience, Ostrom used the economic game theory framework to analyze the theoretical design of the institutions for managing CPR. She complimented the economic analysis with secondary case studies of field research to look for patterns to understand and predict when they were stable and when they risked tragic ends.
While Ostrom did find tragic cases, she also found success cases from Switzerland, Spain, Philippines and Japan (Ostrom, 1990). She recognized the potential for the free rider problem, but also found solutions that did not take the traditional institutional forms of the “firm” or the “state”. The forms she encounters can be thought of as hybrids which share features of the two traditional forms but do not fit into either the employee-consumer-entrepreneur roles in a for-profit firm or the citizen-governor roles in the state which commands a monopoly on coercive force.
Features she identified with the successful cases overlap with a number of free market principles (Ostrom, 1990)
Clearly defined boundaries
Incorporation of site specific information
Decentralized structure
Careful attention to design of monitoring
Enforcement of rules
Opportunity for the participants to be able to adjust and fine tune these rules through democratic participation.
While the institutions for governing appear similar, profit and rent seeking are not the only motives driving participation and commitment and there are clear differences in the ownership structure of the traditional for-profit firm model. There are multiple forms of collective ownership participation - both direct and representative and there is less segregation of roles between labor, shareholders and customers. Participants fulfil combinations of these roles (Ostrom, 1990). The rules and the structures accounted for both reciprocal, cooperative, conforming and selfish “opportunistic” tendencies. Co-operative "Co-ops" are examples of small-scale democratically owned institutions that share some of the features of Ostrom's best practices. The implication of Ostrom’s insights for the problem of setting rules and governing restraint on individuals selfish interests is that it does not need to be left to chance as a second-order invisible hand. Instead of taking a leap-of-faith on the "invisible hand" either first or second order, the rule determination process can be formally represented with democratic like institutions, explicit forms of rights of representation and channels for direct participation in rule setting and enforcement.
