In National Affairs, I contrast institutions with networks.
an institution can be characterized as a set of roles…a set of responsibilities as well as authority …
Institutional roles are also regular and persistent. We expect the assistant manager to be at a particular place doing specific work at a regular time, and we rely on him to stay on the job until the workday has officially ended. Moreover, the assistant manager is expected to return the next workday, the workday after that, and so on.
Networks, by contrast, are a set of interpersonal connections. Network connections are not defined in terms of responsibility and authority; there is no written agreement stating what a Twitter user owes a follower or vice versa. Such connections are easily added and dropped: All it takes to follow or unfollow someone on Twitter is a click of a mouse or a tap of a phone screen. One can sign up for Twitter, Facebook, and LinkedIn in a few minutes, though building up a useful set of connections does take more effort.
Network connections are also intermittent and ad hoc.
Will networks supersede institutions? Not necessarily.
When compared to networks, institutions have two advantages: positions of authority and mechanisms of accountability.
The internet has less institutional structure.
No internet courts exist to settle disputes; no police force patrols the internet for cybercrime. This lack of authority creates problems. For example, unsolicited commercial emails — otherwise known as "spam" — have plagued internet users for nearly three decades.
Had I composed the essay more recently, I probably would have used the FTX crypto scam as an illustration. In the world of banking, there is an authority in place to hold bankers accountable and to insure customers’ deposits. FTX’s customers suffered from the lack of accountability and authority in network finance.
But institutions are not always favored.
As time goes on and circumstances change, institutions suffer from decay. They tend to resist useful innovations because those updates might change or eliminate established roles. They opt instead for innovations that add authority to existing roles, regardless of whether that authority can be put to good use. And as people within institutions learn to "game the system," institutional mechanisms of accountability become less effective over time.
I go on to cite universities as examples of institutions that have decayed—fatally, I believe.
I conclude with this speculative idea:
Institutions, including the government, are reasonably well adapted to the world of the physical. Networks, on the other hand, may be better suited to the world of the virtual.
Please read the entire essay before commenting.
I completely agree with your analysis of networks and institutions. While I generally respect Balaji, I find his Network State concept as not intrinsically compelling for the reasons you articulate. But I forgive him because he is an investor in Pronomos Capital, which is investing in new jurisdictions in the real world. The Network State concept is thus a form of marketing for the more fundamental work of developing new jurisdictions.
It may be time for you to visit Prospera, institutionally the most advanced new jurisdiction in the world. Their team includes Oliver Porter, who developed the government services outsourcing model that was successful in Sandy Springs, GA; Tom Murcott, who developed New Songdo City, a new development less than 20 years old with several hundred thousand residents; Jeffrey Singer, former CEO of the Dubai International Financial Centre; Shanker Singham, one of the most experienced and knowledgeable experts in international trade law; and so forth. These are serious people with serious experience developing and managing real world institutions.
The entire Special Economic Zone (SEZ) movement has seen explosive growth in the past few decades, from a few dozen in the 70s to thousands today. SEZs are a proven technology. SEZs with distinctive common law legal systems, which differ from local law, have been developed in Dubai, Abu Dhabi, Kazakhstan, Honduras, and Rwanda, with another one forthcoming in Colombia. Thus while not yet a "mature" institutional technology, inserting a common law zone within a nation is no longer a frontier institutional technology.
Moreover, it is based in part on the international arbitration framework. International arbitration is a very mature institutional technology. I recommend Ribstein and O'Hara's The Law Market,
as a very pragmatic approach to how we already have a well-developed, mature international market in legal systems, with dozens of concrete examples.
One of the distortions of the chattering on this movement is it is dominated by people who are fascinated with libertarian ideas, either for or against. When one becomes more deeply involved, it quickly becomes a matter of more mundane institutional details, most of which are mature.
And yet what is exciting is integrating institutional innovation with mature, experienced institutional norms and practitioners already in place, yet with far more flexibility than is available within most other nation-state institutions.
The Adrianople Group is another interesting development along these lines,
Founded by people who were inspired by the vision of free cities, but are now becoming a leading nuts-and-bolts consultancy for the SEZ industry, including creating the first global map of zones and aggregating commercially valuable information which had not previously been available from one source.
Balaji's Network State is inspiring virtual communities to become excited about possibly moving to one or another of these new jurisdictions in the future. But the real work is being done by institution builders on the ground working within well established industries with long, proven track records of building new institutions using mature institutional technologies.
And, yes, the government of Honduras is trying to remove Prospera's legal autonomy, but whether or not they succeed, this is a global movement that is well beyond the particulars of what happens there. Moreover, the dispute between Prospera and the government of Honduras is taking place within well established international legal frameworks. Prospera recently sued the government of Honduras for $10.775 billion within the CAFTA-DR framework,
The world of new jurisdictions and institutional innovation is a dynamic, exciting realm that has far more depth than is apparent in Balaji's Network State concept.
I’m not quickly finding it, but I recall that you have written one or twice on an approach to replacing university education with something more like a network. How do you apply the ideas in this article to that idea?