Software as an Institution

The rules of the game, known to economists as institutions and to managers as corporate culture, usually entail inoperable ideas. That is, any country or business has some rules, but these rules coincide neither with optimal rules nor with leadership vision. Maybe with an exception of the top decile of performers or something like this.

This inoperability isn’t surprising since the rules have obscure formulations. Douglass North and his devotees did best at narrowing what “good institutions” are, but with North’s bird-eye view, you also need an ant-eye view on how changes happen.

An insider perspective had been there all the time, of course. Organizational psychology and operations management organized many informalities happening in firms. In general, we do know something about what managers should and shouldn’t do. Still, many findings aren’t robust as we’d like them to be. There’s also a communication problem between researchers and practitioners, meaning neither of the two cares what the other is doing.

These three problems—formulation, coverage, and communication of effective rules—have an unexpected solution in software. How comes? Software defines the rules.

Perhaps Excel doesn’t create such an impression, but social networks illustrate this case best. After the 90s, software engineers and designers became more involved in the social aspects of their products. Twitter made public communications shorter and arguably more efficient. In contrast to anonymous communities of the early 2000s, Facebook insisted on real identities and secure environment. Instagram and Pinterest focused users on sharing images. All major social networks introduced upvotes and shares for content ranking.

Governance in online communities can explain success of StackExchange and Quora in the Q&A space, where Google and Amazon failed. Like Wikipedia, these services combined successful incentive mechanisms with community-led monitoring. This monitoring helped dealing with low-quality content that would dominate if these services simply grew the user base, as previous contenders tried.

Wikipedia has 120,000 active editors, which is about twice as many employees as Google has (or alternatively, twelve Facebooks). And the users under the jurisdiction of major social networks:

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So software defines the rules that several billion people follow daily. But unlike soft institutions, the rules engraved in code are very precise. Much more so than institutional ratings for countries or corporate culture leaflets for employees. Code-based rules also imply enforcement (“fill in all fields marked with ‘*'”). Less another big issue.

Software captures the data related to the impact of rules on performance. For example, Khan Academy extensively uses performance tracking to design the exercises that students are more likely to complete — something that schools with all the experienced teachers do mostly through compulsion.

Finally, communication between researchers and practitioners becomes less relevant because critical decisions get made at the R&D stage. Researchers don’t have to annoy managers in trenches because software already contains the best practices. Like at Amazon.com that employed algorithms to grant its employees access privileges based on the past performance.

These advantages make effective reproducible institutions available to communities and businesses. That is, no more obscure books, reports, and blog posts about best practices and good institutions. Just a product that does specific things, backed by robust research.

What would that be? SaaI: software as an institution?

After the Ruble, What Currency Falls Next?

Back to the PPP vs exchange rate disparity that occurred in Russia and might explain the recent ruble crisis:

xtline_ppp_fer_rus

The Russian PPP factor grew faster than the exchange rate, so by 2012 the difference between the indices of the two reached 1.5. A large difference appears in some countries hit by the 1997 Asian crisis:

xtline_ppp_fer

Indonesia looks very much like Russia. The media report that the rupiah already fell to its post-1998 minimum and that Asian central bankers are concerned about the ruble.

But Asia is not the worst place. Here’s the distribution of the same indicator across countries:

hist_di_ppp2fer

And the countries with the highest accumulated disparity are:

hbar_di_ppp2fer

The group consists of former Soviet republics, oil exporters with weak institutions, and poorest African countries. Runner-up Belarus already imposed a 30% tax on currency exchange (that is, added 30% to the dollar’s price) and raised the interest rate to 50%. Russia is in the middle, surrounded by Indonesia and Moldova. Since after this December, Russia’s coefficient is much lower, of course. Ukraine also devalued its currency this summer and drops out of the list.

Why does this problem appear at all? Apart from the economic literature, there’s a good intuition explained, for example, by Lee Kuan Yew. Very much admired by corrupted autocratic leaders, he recollects that the absence of corruption was the number one reason why Singapore handled the 1997 crisis better than its neighbors. Some countries on the list can’t say the same about themselves. And that makes them the next most likely candidates for big troubles.

How Competition Destroys Confidence

I’ve been wondering why Gallup excludes science and academia from the list of institutions Americans can be confident in. The firm runs that poll since 1973 and had 40 years to ask. Maybe it didn’t because academia itself is far from being influential. Anyway, there’re other poll, with scientists mentioned:

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PEW
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PEW

A bigger puzzle is, why do these exact institutions earn so much confidence?

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After all, the military have lots of secrets, the clergy is not accountable, the medical system charges a four-digit bill for dealing with a cold. What happens on the other end? The President and Congress, which are elected by people. The media—they’re open, you can check them.

Any versions? Well, the military, police, church, supreme court are monopolies. In contrast, the President, Congress, and the media furiously compete (often with each other). In 80 years, you can live through ten presidents and visit the same church every Sunday. You have ten local newspapers, but one police department.

Openness creates opportunities for information disclosure. Illustratively, competition between Obama and Republicans reveals lots of details. These blame games, which are impossible in hierarchical and secretive monopolies, reveal facts biased against the other side. And negative information is more powerful than good stories. As Warren Buffett said, “It takes 20 years to build a reputation and five minutes to ruin it.”

This competition creates confusion and distrust, but it also gives a chance to compare different opinions and understand who does better. Public institutions holding a monopoly grant no chances. So, they seem to be fine. If they say that the Earth is squared, then it’s squared—who would question this obvious fact?