I recently wrote two SocialEarth posts - one on short-termism in the private sector and another on starvation in the nonprofit sector - that randomly and beautifully came together the other day in the form of Hernando de Soto's book "The Other Path."
"The Other Path," Perverse Incentives, and Social Devolution
Hernando de Soto is a highly regarded and sometimes controversial Peruvian economist who is given significant credit for the downfall of the Shining Path, Peru's Maoist guerrilla group known for its brutal tactics.
Written in 1986, De Soto's work highlighted the entrepreneurial qualities and aspirations of Peru's poorer urban classes, as well as the mercantilist policies and laws that were preventing these classes, and Peruvian society overall, from prospering. He brought to light, for example, the amount of time and money required to legally secure land, build a house, and start a business (often years and amounts of money that equated to many times an average salary).
As indicated by its title, "The Other Path" re-framed the struggle of Peru's poor from one of proletarian suffering and revolution (espoused by the Shining Path) to a fight for markets and policies that were inclusive and universally enabling rather than at the service of the politically-connected. His message resonated and, importantly, gave Peruvians an alternative war to wage in the battle against poverty and inequality.
The other critical lesson to be gleaned from De Soto's work, and the one pertinent to this post, is the following:
When official laws and policies exclude large groups of people or otherwise fail to be relevant to large sectors of society, these excluded groups are given incentives to create their own norms and institutions, in line with their own needs and values, in competition with the formal framework.
We see this all the time in the world around us - both in developing and developed nations. In the U.S., people who believe in small government find "creative" ways to avoid taxes. Underage individuals nonetheless consume alcohol. Gays and lesbians find churches who will marry them, despite laws that prohibit or do not recognize same-sex marriage. Across Latin America, poor urban families "invade" public and private lands in efforts to acquire property and housing where these are otherwise very difficult to attain. In Peru, according to De Soto's research, street vendors developed complex associations with other vendors to procure high-traffic locations and then protect their presumptive right to these locales, even when laws did not permit such action.
The common thread tying these examples together is the idea that when laws, institutions, and norms fail to stay relevant, people begin to systematically act in illegal ways, their actions justified by moral philosophies that are different and/or more progressive. In instances where the law and institutions eventually adapt, these episodes of illegality are temporary. Society accepts the moral basis for the formerly illegal action, we adapt our laws, and we go back to behaving legally. This was the case with the civil rights movement in the U.S. and is likely to be the eventual outcome of the battle for same-sex marriage. When laws and institutions fail to adapt effectively, however, and when government does not have the means to control illicit behavior, laws lose their legitimacy, illegality in general becomes increasingly acceptable, and whole generations can start to adopt the notion that ends justify means. In other words, if you believe you have just reason for breaking the law, go ahead and do it.
Illegal actions are, indeed, justified by higher-order rights and moral philosophies in certain cases (the U.S. Declaration of Independence, for example, openly promotes revolution in the face of despotism). However, the "moral drift" that results when laws and institutions fail to adapt and people are left to behave illegally can have disastrous long-term societal consequences and be incredibly hard to recover from.
Creating Another Path for Our Organizations
Okay, so where does that leave us?
Well, to bring this down to a very immediate and practical (and perhaps more mundane) level, I believe that, as a result of the unrealistic expectations we place on our organizations, both for- and nonprofit, we create incentives for them to behave badly.
In the case of for-profit organizations, our expectation that companies produce greater returns quarter after quarter drives "short-termism" and creates:
- Disincentives to act in environmentally and socially sustainable ways
- Incentives to engage in unethical, "creative" accounting
- Incentives to make questionable business decisions, such as acquisitions that more-often-than-not destroy value
In the case of nonprofit organizations, our unrealistic expectations regarding overhead create:
- Incentives to engage in unethical, "creative" accounting
- Incentives to not give employees adequate job training and competitive wages
- Disincentives and an often an inability to invest in the sustainable growth of the organization
In these cases, we are the short-sighted lawmakers and government bureaucrats who have failed to adapt. We have created norms and institutions that have failed to keep up with the needs and best interests of our organizations and our societies. And our failure is both inhibiting the creation of a better world and encouraging our leaders to make unethical, undesirable, or simply questionable decisions that become more and more "normal" every day. Time to stop pointing the finger.
We got ourselves into this mess. What are we going to do to get ourselves out? How are we going to create new norms and institutions that recognize reality and pull our societies and organizations away from the ledge?
