Institutions and cultural capacity: A systems perspective

Abstract

Societies rely on a mixture of markets, hierarchies, and democratic institutions to allocate resources, make decisions, and establish order. The success of any one institution depends on its design features, the nature of the task, and society’s cultural capacities. They also crucially depend on one another. In this paper, we model institutions and cultural capacities as interdependent. We define cultural-institutional equilibria as configurations in which cultural capacities are consistent with institutional choices, and institutional choices are optimal given tasks and culture. There is a disconnect between producing and leveraging cultural capacity. We consider the implications of this disconnect. In particular, some institutions produce generic cultural capacity, generating positive externalities that improve the performance of other institutions in society, while others are primarily leveragers, taking advantage of the cultural capacity created by other institutions.

We highlight five results. First, we show that positive feedback between cultural capacities and institutional performance produces multiple equilibria, providing a logic for why cultural capacities and ensemble compositions vary by place. Second, we show that cultural-institutional equilibria are generically not efficient because of a disconnect between producing and leveraging cultural capacity. Third, we show that if one type of institution, say markets, builds cultural capacities that hinder the performance of another institutional type, say democracies, then market expansion can lead to the demise of democracies. Fourth, we derive a paradox of cultural capacity-building: an institutional type that produces high levels of generic cultural capacity—notably, democracy—can all but disappear by making other institutional types relatively more efficient. Finally, we build a more complex model with five types of institutions that includes a positive feedback loop between two types of institutions and show how this increases the proportion of those types. This finding aligns with empirical evidence of the growth in algorithmic institutions and markets and the decline in hierarchical organizations and democracies.