University as a causal structure

An earlier post laid out a case for a modest social holism, in the form of a set of arguments for the idea that there are social forces and causal powers that are relatively autonomous from the features of the individuals who constitute them (link). These ideas parallel some of those offered by Dave Elder-Vass that were discussed in a recent post. I hold that this modest holism is compatible with the ideas of methodological localism (link) and the requirement that social causes require microfoundations (link, link). At the same time, it helps make sense of the fairly obvious point that social institutions, norms, and linguistic communities exercise powerful influence over the thoughts and behaviors of individuals.

The causal processes linking institution and individuals appear to be fully two-directional, with reinforcing feedback loops. The institution consists of a set of rules, processes, and role-players. The rules are both formal (laws, standard practice guides, by-laws) and informal (long-standing and widely recognized practices and norms governing specific kinds of activity). Some of the role players have the role of enforcing the rules and incentivizing the desired behaviors. These "enforcers" may act on the basis of a range of levels of understanding and commitment; so enforcement itself is variable. Ordinary participants within the institution are subject to the incentives and sanctions created by the rules and the enforcers; so their behavior is to some extent responsive to the rules. And ordinary participants in turn have internalized some understanding of the core processes and regulations of the institution -- and are (in varying degrees of involvement) prepared to encourage or sanction the behavior of their peers based on their understanding of the rules.

This description raises a number of theoretical issues. (1) What social processes establish the relative degree of continuity of the rules and practices of the institution? What prevents "drift" away from the rules of a given moment? (2) What social and agentic processes lead individuals to conform to the rules, and under what circumstances do individuals subvert or evade the rules? (3) What social processes ensure a reasonable degree of commitment by "agents" (officers, managers, directors) of the institution to its foundational rules and practices? How is an alignment between rules, agents, and participants established and maintained?

We might imagine that there are "tipping points" when it comes to adherence to the institution's norms, rules, and practices. When a sufficient number of agents or participants sincerely endorse the rules and adhere to them, this leads other agents to do so as well. When rule evasion is perceived to be common, this probably leads to a precipitous decline in rule adherence. So widespread conformance is itself a causal factor in the persistence of the rules into the next time period.

But how do we go beyond these general statements about structural causation? It may be helpful to think through a familiar example -- the ways in which a specific institution like a university both shapes and influences the behavior of many individuals, and the ways in which its own internal functions and culture are themselves constituted by the behaviors, beliefs, attitudes, and morés of the individuals who fall within its ambit. Here is a sketch of the functional organization of a fictitious university:

The diagram has place-holders for formal, explicit rules and procedures (by-laws and operating regulations) and informal norms and practices; it has a sketch of some typical processes and transactions within which actors need to make various performances (tenure evaluation processes, research account oversight, purchasing decisions); and it identifies core "enforcer and incentivizer" roles -- CFO, provost, dean, auditors ... The actions that take place within the university generally fall within the scope of one or more of these regulations and norms.  Actors (faculty members, front-line staff, administrators) are generally aware of the procedures that regulate their actions, and they either conform or deviate from the procedures.  If they conform, generally things go well for them; if they deviate (submit false receipts for travel reimbursement) they are often detected and punished.  So behavior of actors within the institution shows a measurable level of conformance with regulations and norms.  And there are direct forms of oversight, reward, and punishment that serve to reinforce compliance.  Finally, to close the circle -- the enforcers and incentivizers themselves fall within a circle of appraisal and accountability; so if their behavior deviates from what the standards and norms of the institution require, there is a likelihood of discovery and remedial action by others.

Outside the scope of the formal and informal norms of the institution, there are a variety of strands of institutional culture.  Faculty, for example, find themselves in specific social settings within the university -- department meetings, faculty clubs, research seminars, etc. -- in which they gain exposure to local attitudes and values.  And, as anyone who has spent much time in a university knows, these experiences often lead up to a fairly stable institutional culture among faculty -- in a department or division, or in the university as a whole (link).  The faculty in a liberal arts college have a rather different culture from that of the faculty at a large research university.  And liberal arts college faculties differ among themselves as well in this respect.

There is another kind of causal influence that is indicated in the first diagram above -- the fact that universities also have relations of influence with other universities.  So if University A is looking to refine or modify its employee benefits policies, it is likely to examine the best practices of University B and C as well; and it is likely to adopt a few of those best practices.  So the network of learning and emulation that exists across institutions is another form of causal influence at the level of the social structure.  Here again, it is not difficult to disaggregate this causal mechanism into specific individual-level actions -- attendance at an ACE conference, a site visit to University B by several representatives of University A, the drafting of a new policy by those individuals when they return home for consideration by a deliberative body, and the ultimate selection of the new policy by the president of the university.

So it isn't difficult to specify the ways in which the institution and its components exercise "macro" causal impact on the behavior of individuals within a university.  An organization develops specific arrangements to solve problems of coordination, incentives, and rule enforcement; and these social arrangements have a strong influence on the behavior of the individuals who live within the institution.  But likewise, it is not difficult to specify how these rules, norms, and enforcement mechanisms are embodied in the actions and mental states of a set of individuals.  The people who occupy positions of influence within this organization have been "trained" by the organization to do their jobs; the skills learned through this training (and through their experience in the position over time) are embodied in their cognitive systems as "managerial skills"; and their motivations and behaviors themselves are subject to a degree of institutional control.  (A dean who refuses to accept the responsibility of maintaining fiscal balance in his or her unit will soon be removed.) This causal system is indeed cyclical: both the organizational components and the participants have history and skills developed by past experience that allow them to function adeptly within the system.  The participants have learned their university "habitus" from prior experience of the university; and the university's rules, norms, and procedures are in turn embodied in the present in the habitus of the current members of the university, and the embodied traces of its norms and rules in the form of written regulations.

University as a causal structure

An earlier post laid out a case for a modest social holism, in the form of a set of arguments for the idea that there are social forces and causal powers that are relatively autonomous from the features of the individuals who constitute them (link). These ideas parallel some of those offered by Dave Elder-Vass that were discussed in a recent post. I hold that this modest holism is compatible with the ideas of methodological localism (link) and the requirement that social causes require microfoundations (link, link). At the same time, it helps make sense of the fairly obvious point that social institutions, norms, and linguistic communities exercise powerful influence over the thoughts and behaviors of individuals.

The causal processes linking institution and individuals appear to be fully two-directional, with reinforcing feedback loops. The institution consists of a set of rules, processes, and role-players. The rules are both formal (laws, standard practice guides, by-laws) and informal (long-standing and widely recognized practices and norms governing specific kinds of activity). Some of the role players have the role of enforcing the rules and incentivizing the desired behaviors. These "enforcers" may act on the basis of a range of levels of understanding and commitment; so enforcement itself is variable. Ordinary participants within the institution are subject to the incentives and sanctions created by the rules and the enforcers; so their behavior is to some extent responsive to the rules. And ordinary participants in turn have internalized some understanding of the core processes and regulations of the institution -- and are (in varying degrees of involvement) prepared to encourage or sanction the behavior of their peers based on their understanding of the rules.

This description raises a number of theoretical issues. (1) What social processes establish the relative degree of continuity of the rules and practices of the institution? What prevents "drift" away from the rules of a given moment? (2) What social and agentic processes lead individuals to conform to the rules, and under what circumstances do individuals subvert or evade the rules? (3) What social processes ensure a reasonable degree of commitment by "agents" (officers, managers, directors) of the institution to its foundational rules and practices? How is an alignment between rules, agents, and participants established and maintained?

We might imagine that there are "tipping points" when it comes to adherence to the institution's norms, rules, and practices. When a sufficient number of agents or participants sincerely endorse the rules and adhere to them, this leads other agents to do so as well. When rule evasion is perceived to be common, this probably leads to a precipitous decline in rule adherence. So widespread conformance is itself a causal factor in the persistence of the rules into the next time period.

But how do we go beyond these general statements about structural causation? It may be helpful to think through a familiar example -- the ways in which a specific institution like a university both shapes and influences the behavior of many individuals, and the ways in which its own internal functions and culture are themselves constituted by the behaviors, beliefs, attitudes, and morés of the individuals who fall within its ambit. Here is a sketch of the functional organization of a fictitious university:

The diagram has place-holders for formal, explicit rules and procedures (by-laws and operating regulations) and informal norms and practices; it has a sketch of some typical processes and transactions within which actors need to make various performances (tenure evaluation processes, research account oversight, purchasing decisions); and it identifies core "enforcer and incentivizer" roles -- CFO, provost, dean, auditors ... The actions that take place within the university generally fall within the scope of one or more of these regulations and norms.  Actors (faculty members, front-line staff, administrators) are generally aware of the procedures that regulate their actions, and they either conform or deviate from the procedures.  If they conform, generally things go well for them; if they deviate (submit false receipts for travel reimbursement) they are often detected and punished.  So behavior of actors within the institution shows a measurable level of conformance with regulations and norms.  And there are direct forms of oversight, reward, and punishment that serve to reinforce compliance.  Finally, to close the circle -- the enforcers and incentivizers themselves fall within a circle of appraisal and accountability; so if their behavior deviates from what the standards and norms of the institution require, there is a likelihood of discovery and remedial action by others.

Outside the scope of the formal and informal norms of the institution, there are a variety of strands of institutional culture.  Faculty, for example, find themselves in specific social settings within the university -- department meetings, faculty clubs, research seminars, etc. -- in which they gain exposure to local attitudes and values.  And, as anyone who has spent much time in a university knows, these experiences often lead up to a fairly stable institutional culture among faculty -- in a department or division, or in the university as a whole (link).  The faculty in a liberal arts college have a rather different culture from that of the faculty at a large research university.  And liberal arts college faculties differ among themselves as well in this respect.

There is another kind of causal influence that is indicated in the first diagram above -- the fact that universities also have relations of influence with other universities.  So if University A is looking to refine or modify its employee benefits policies, it is likely to examine the best practices of University B and C as well; and it is likely to adopt a few of those best practices.  So the network of learning and emulation that exists across institutions is another form of causal influence at the level of the social structure.  Here again, it is not difficult to disaggregate this causal mechanism into specific individual-level actions -- attendance at an ACE conference, a site visit to University B by several representatives of University A, the drafting of a new policy by those individuals when they return home for consideration by a deliberative body, and the ultimate selection of the new policy by the president of the university.

So it isn't difficult to specify the ways in which the institution and its components exercise "macro" causal impact on the behavior of individuals within a university.  An organization develops specific arrangements to solve problems of coordination, incentives, and rule enforcement; and these social arrangements have a strong influence on the behavior of the individuals who live within the institution.  But likewise, it is not difficult to specify how these rules, norms, and enforcement mechanisms are embodied in the actions and mental states of a set of individuals.  The people who occupy positions of influence within this organization have been "trained" by the organization to do their jobs; the skills learned through this training (and through their experience in the position over time) are embodied in their cognitive systems as "managerial skills"; and their motivations and behaviors themselves are subject to a degree of institutional control.  (A dean who refuses to accept the responsibility of maintaining fiscal balance in his or her unit will soon be removed.) This causal system is indeed cyclical: both the organizational components and the participants have history and skills developed by past experience that allow them to function adeptly within the system.  The participants have learned their university "habitus" from prior experience of the university; and the university's rules, norms, and procedures are in turn embodied in the present in the habitus of the current members of the university, and the embodied traces of its norms and rules in the form of written regulations.

University as a causal structure

An earlier post laid out a case for a modest social holism, in the form of a set of arguments for the idea that there are social forces and causal powers that are relatively autonomous from the features of the individuals who constitute them (link). These ideas parallel some of those offered by Dave Elder-Vass that were discussed in a recent post. I hold that this modest holism is compatible with the ideas of methodological localism (link) and the requirement that social causes require microfoundations (link, link). At the same time, it helps make sense of the fairly obvious point that social institutions, norms, and linguistic communities exercise powerful influence over the thoughts and behaviors of individuals.

The causal processes linking institution and individuals appear to be fully two-directional, with reinforcing feedback loops. The institution consists of a set of rules, processes, and role-players. The rules are both formal (laws, standard practice guides, by-laws) and informal (long-standing and widely recognized practices and norms governing specific kinds of activity). Some of the role players have the role of enforcing the rules and incentivizing the desired behaviors. These "enforcers" may act on the basis of a range of levels of understanding and commitment; so enforcement itself is variable. Ordinary participants within the institution are subject to the incentives and sanctions created by the rules and the enforcers; so their behavior is to some extent responsive to the rules. And ordinary participants in turn have internalized some understanding of the core processes and regulations of the institution -- and are (in varying degrees of involvement) prepared to encourage or sanction the behavior of their peers based on their understanding of the rules.

This description raises a number of theoretical issues. (1) What social processes establish the relative degree of continuity of the rules and practices of the institution? What prevents "drift" away from the rules of a given moment? (2) What social and agentic processes lead individuals to conform to the rules, and under what circumstances do individuals subvert or evade the rules? (3) What social processes ensure a reasonable degree of commitment by "agents" (officers, managers, directors) of the institution to its foundational rules and practices? How is an alignment between rules, agents, and participants established and maintained?

We might imagine that there are "tipping points" when it comes to adherence to the institution's norms, rules, and practices. When a sufficient number of agents or participants sincerely endorse the rules and adhere to them, this leads other agents to do so as well. When rule evasion is perceived to be common, this probably leads to a precipitous decline in rule adherence. So widespread conformance is itself a causal factor in the persistence of the rules into the next time period.

But how do we go beyond these general statements about structural causation? It may be helpful to think through a familiar example -- the ways in which a specific institution like a university both shapes and influences the behavior of many individuals, and the ways in which its own internal functions and culture are themselves constituted by the behaviors, beliefs, attitudes, and morés of the individuals who fall within its ambit. Here is a sketch of the functional organization of a fictitious university:

The diagram has place-holders for formal, explicit rules and procedures (by-laws and operating regulations) and informal norms and practices; it has a sketch of some typical processes and transactions within which actors need to make various performances (tenure evaluation processes, research account oversight, purchasing decisions); and it identifies core "enforcer and incentivizer" roles -- CFO, provost, dean, auditors ... The actions that take place within the university generally fall within the scope of one or more of these regulations and norms.  Actors (faculty members, front-line staff, administrators) are generally aware of the procedures that regulate their actions, and they either conform or deviate from the procedures.  If they conform, generally things go well for them; if they deviate (submit false receipts for travel reimbursement) they are often detected and punished.  So behavior of actors within the institution shows a measurable level of conformance with regulations and norms.  And there are direct forms of oversight, reward, and punishment that serve to reinforce compliance.  Finally, to close the circle -- the enforcers and incentivizers themselves fall within a circle of appraisal and accountability; so if their behavior deviates from what the standards and norms of the institution require, there is a likelihood of discovery and remedial action by others.

Outside the scope of the formal and informal norms of the institution, there are a variety of strands of institutional culture.  Faculty, for example, find themselves in specific social settings within the university -- department meetings, faculty clubs, research seminars, etc. -- in which they gain exposure to local attitudes and values.  And, as anyone who has spent much time in a university knows, these experiences often lead up to a fairly stable institutional culture among faculty -- in a department or division, or in the university as a whole (link).  The faculty in a liberal arts college have a rather different culture from that of the faculty at a large research university.  And liberal arts college faculties differ among themselves as well in this respect.

There is another kind of causal influence that is indicated in the first diagram above -- the fact that universities also have relations of influence with other universities.  So if University A is looking to refine or modify its employee benefits policies, it is likely to examine the best practices of University B and C as well; and it is likely to adopt a few of those best practices.  So the network of learning and emulation that exists across institutions is another form of causal influence at the level of the social structure.  Here again, it is not difficult to disaggregate this causal mechanism into specific individual-level actions -- attendance at an ACE conference, a site visit to University B by several representatives of University A, the drafting of a new policy by those individuals when they return home for consideration by a deliberative body, and the ultimate selection of the new policy by the president of the university.

So it isn't difficult to specify the ways in which the institution and its components exercise "macro" causal impact on the behavior of individuals within a university.  An organization develops specific arrangements to solve problems of coordination, incentives, and rule enforcement; and these social arrangements have a strong influence on the behavior of the individuals who live within the institution.  But likewise, it is not difficult to specify how these rules, norms, and enforcement mechanisms are embodied in the actions and mental states of a set of individuals.  The people who occupy positions of influence within this organization have been "trained" by the organization to do their jobs; the skills learned through this training (and through their experience in the position over time) are embodied in their cognitive systems as "managerial skills"; and their motivations and behaviors themselves are subject to a degree of institutional control.  (A dean who refuses to accept the responsibility of maintaining fiscal balance in his or her unit will soon be removed.) This causal system is indeed cyclical: both the organizational components and the participants have history and skills developed by past experience that allow them to function adeptly within the system.  The participants have learned their university "habitus" from prior experience of the university; and the university's rules, norms, and procedures are in turn embodied in the present in the habitus of the current members of the university, and the embodied traces of its norms and rules in the form of written regulations.

Fresh thinking about government

The eminent neo-Confucian scholar Tu Weiming argues for the importance of bracketing our Western-centric ideas about society, progress, and justice when we think about our global futures. (Here is an interesting article by Tu titled "Mutual Learning as an Agenda for Social Development"; link.) So for a moment let us put aside the familiar rhetoric about "democracy" that usually surfaces when we talk about how societies ought to be governed. Much of that language derives from Western political theorists like Hobbes, Locke, Jefferson, and Mill, and arguably shows the signs of times and places very different from current social realities. Can we begin to rethink the task of collective governance in a way that might help frame current discussions more fruitfully?  Is it possible to rethink democracy in a way that is less Western-centric?

In order to think carefully about the idea of government, we need two different sets of assumptions: first, what the social realities or conditions are within the context of which "government" needs to function; and second, a core set of value assumptions that define the standards to which government ought to conform.

What are the fundamentals? There are several basic social realities that are hard to seriously question, and there are a few normative ideas that have credibility but could be debated.

Large social groups require governance.

Let's define a large group as a population of greater than 50,000 people living in proximity to one another, involved in a range of interactions and exchanges with each other and sharing access to a set of resources. This establishes interdependence and mutual effects among persons.

Here are some core governance needs: Maintenance of public order, management of conflicts, provision of some set of public goods, establishment of a system of rules and laws, collection of taxes to support the activities of government.

Persons have interests and commitments that they care about.

People have interests, desires, and commitments, and these interests lead to competition and cooperation, predation and defense. They behave purposively and strategically to further their interests and protect themselves against predation.

There are perhaps other basic facts about individuals that would be important from the perspective of other civilizational values systems -- for example,

Persons are psychologically and socially defined by the social relationships within which they exist.

Here is another salient fact:

Governments take actions that affect different people differently.

And another fact:

The powers of government create opportunities for corruption, preferential treatment, and favoring of the powerful by government officials.

So citizens care deeply about the outcomes of governmental action, and they are especially concerned at the possibility that others may gain great advantages through corrupt influence on officials and agencies.

Now consider a few values that most people would probably accept.

• Government should pursue the public good, not the private good of officials or private individuals.
• Government should not favor some persons over others.
• Government should take the desires and needs of citizens into account when formulating rules, policies, and laws.
• Government policies and laws should reflect the preferences and interests of citizens.
• Government should establish a neutral framework of law and policy that is applied without regard to persons and private interests.
• Citizens should have the ability to express criticism and disagreement with government actions.

Designing government requires that we take account of these basic facts and do our best to embody the values we agree about.  We need a set of institutions that will be durable, that will reinforce the fundamental values around which they are designed, and that will be difficult to distort when self-interested actors occupy roles within them.  Most fundamentally, we need a set of institutions that embody pursuit of the public good; that reflect citizen preferences; and that secure a just system of law for all citizens.

So what kinds of governance institutions are compatible with this list of facts and values?

This is where the mechanisms of constitutional electoral democracy come in. Western political theorists argue that a constitution sets the regulative framework for governance -- the fundamental legal protections defining citizenship and the scope and role of government. And electoral democracy permits citizens to express their preferences and enforce good performance by officials.  So policies are selected that correspond to the preferences of citizens; and they are implemented in good faith under the enforcement mechanism of representative electoral democracy.

But here is the more challenging question: are there other institutional arrangements that might fit these facts and values about as well? In particular, could we imagine a Confucian single-party state with an energetic anti-corruption office, an energetic and independent "investigative journalism" office, and a robust social survey office that serves the functions of gathering citizen preferences and concerns? Could such a system genuinely embody the public good in a hypothetical modern Asian society? In other words, could we imagine an administrative-authority system that effectively embodied the public good and protections of the fundamental interests and preferences of citizens? Could the "checks and balances" represented by an electoral system be established through other means?

It is easy to see objections to this hypothetical possibility; they largely come down to the problem of independence and effectiveness when a regulative office finds it necessary to criticize powerful officials or private persons. But it's worth asking the question of alternative governance design, and it's not inconceivable that solutions to these problems could be created.

(Here is an interesting collection of Tu Weiming's writings; Humanity and Self-Cultivation: Essays in Confucian Thought.)

Fresh thinking about government

The eminent neo-Confucian scholar Tu Weiming argues for the importance of bracketing our Western-centric ideas about society, progress, and justice when we think about our global futures. (Here is an interesting article by Tu titled "Mutual Learning as an Agenda for Social Development"; link.) So for a moment let us put aside the familiar rhetoric about "democracy" that usually surfaces when we talk about how societies ought to be governed. Much of that language derives from Western political theorists like Hobbes, Locke, Jefferson, and Mill, and arguably shows the signs of times and places very different from current social realities. Can we begin to rethink the task of collective governance in a way that might help frame current discussions more fruitfully?  Is it possible to rethink democracy in a way that is less Western-centric?

In order to think carefully about the idea of government, we need two different sets of assumptions: first, what the social realities or conditions are within the context of which "government" needs to function; and second, a core set of value assumptions that define the standards to which government ought to conform.

What are the fundamentals? There are several basic social realities that are hard to seriously question, and there are a few normative ideas that have credibility but could be debated.

Large social groups require governance.

Let's define a large group as a population of greater than 50,000 people living in proximity to one another, involved in a range of interactions and exchanges with each other and sharing access to a set of resources. This establishes interdependence and mutual effects among persons.

Here are some core governance needs: Maintenance of public order, management of conflicts, provision of some set of public goods, establishment of a system of rules and laws, collection of taxes to support the activities of government.

Persons have interests and commitments that they care about.

People have interests, desires, and commitments, and these interests lead to competition and cooperation, predation and defense. They behave purposively and strategically to further their interests and protect themselves against predation.

There are perhaps other basic facts about individuals that would be important from the perspective of other civilizational values systems -- for example,

Persons are psychologically and socially defined by the social relationships within which they exist.

Here is another salient fact:

Governments take actions that affect different people differently.

And another fact:

The powers of government create opportunities for corruption, preferential treatment, and favoring of the powerful by government officials.

So citizens care deeply about the outcomes of governmental action, and they are especially concerned at the possibility that others may gain great advantages through corrupt influence on officials and agencies.

Now consider a few values that most people would probably accept.

• Government should pursue the public good, not the private good of officials or private individuals.
• Government should not favor some persons over others.
• Government should take the desires and needs of citizens into account when formulating rules, policies, and laws.
• Government policies and laws should reflect the preferences and interests of citizens.
• Government should establish a neutral framework of law and policy that is applied without regard to persons and private interests.
• Citizens should have the ability to express criticism and disagreement with government actions.

Designing government requires that we take account of these basic facts and do our best to embody the values we agree about.  We need a set of institutions that will be durable, that will reinforce the fundamental values around which they are designed, and that will be difficult to distort when self-interested actors occupy roles within them.  Most fundamentally, we need a set of institutions that embody pursuit of the public good; that reflect citizen preferences; and that secure a just system of law for all citizens.

So what kinds of governance institutions are compatible with this list of facts and values?

This is where the mechanisms of constitutional electoral democracy come in. Western political theorists argue that a constitution sets the regulative framework for governance -- the fundamental legal protections defining citizenship and the scope and role of government. And electoral democracy permits citizens to express their preferences and enforce good performance by officials.  So policies are selected that correspond to the preferences of citizens; and they are implemented in good faith under the enforcement mechanism of representative electoral democracy.

But here is the more challenging question: are there other institutional arrangements that might fit these facts and values about as well? In particular, could we imagine a Confucian single-party state with an energetic anti-corruption office, an energetic and independent "investigative journalism" office, and a robust social survey office that serves the functions of gathering citizen preferences and concerns? Could such a system genuinely embody the public good in a hypothetical modern Asian society? In other words, could we imagine an administrative-authority system that effectively embodied the public good and protections of the fundamental interests and preferences of citizens? Could the "checks and balances" represented by an electoral system be established through other means?

It is easy to see objections to this hypothetical possibility; they largely come down to the problem of independence and effectiveness when a regulative office finds it necessary to criticize powerful officials or private persons. But it's worth asking the question of alternative governance design, and it's not inconceivable that solutions to these problems could be created.

(Here is an interesting collection of Tu Weiming's writings; Humanity and Self-Cultivation: Essays in Confucian Thought.)

Fresh thinking about government

The eminent neo-Confucian scholar Tu Weiming argues for the importance of bracketing our Western-centric ideas about society, progress, and justice when we think about our global futures. (Here is an interesting article by Tu titled "Mutual Learning as an Agenda for Social Development"; link.) So for a moment let us put aside the familiar rhetoric about "democracy" that usually surfaces when we talk about how societies ought to be governed. Much of that language derives from Western political theorists like Hobbes, Locke, Jefferson, and Mill, and arguably shows the signs of times and places very different from current social realities. Can we begin to rethink the task of collective governance in a way that might help frame current discussions more fruitfully?  Is it possible to rethink democracy in a way that is less Western-centric?

In order to think carefully about the idea of government, we need two different sets of assumptions: first, what the social realities or conditions are within the context of which "government" needs to function; and second, a core set of value assumptions that define the standards to which government ought to conform.

What are the fundamentals? There are several basic social realities that are hard to seriously question, and there are a few normative ideas that have credibility but could be debated.

Large social groups require governance.

Let's define a large group as a population of greater than 50,000 people living in proximity to one another, involved in a range of interactions and exchanges with each other and sharing access to a set of resources. This establishes interdependence and mutual effects among persons.

Here are some core governance needs: Maintenance of public order, management of conflicts, provision of some set of public goods, establishment of a system of rules and laws, collection of taxes to support the activities of government.

Persons have interests and commitments that they care about.

People have interests, desires, and commitments, and these interests lead to competition and cooperation, predation and defense. They behave purposively and strategically to further their interests and protect themselves against predation.

There are perhaps other basic facts about individuals that would be important from the perspective of other civilizational values systems -- for example,

Persons are psychologically and socially defined by the social relationships within which they exist.

Here is another salient fact:

Governments take actions that affect different people differently.

And another fact:

The powers of government create opportunities for corruption, preferential treatment, and favoring of the powerful by government officials.

So citizens care deeply about the outcomes of governmental action, and they are especially concerned at the possibility that others may gain great advantages through corrupt influence on officials and agencies.

Now consider a few values that most people would probably accept.

• Government should pursue the public good, not the private good of officials or private individuals.
• Government should not favor some persons over others.
• Government should take the desires and needs of citizens into account when formulating rules, policies, and laws.
• Government policies and laws should reflect the preferences and interests of citizens.
• Government should establish a neutral framework of law and policy that is applied without regard to persons and private interests.
• Citizens should have the ability to express criticism and disagreement with government actions.

Designing government requires that we take account of these basic facts and do our best to embody the values we agree about.  We need a set of institutions that will be durable, that will reinforce the fundamental values around which they are designed, and that will be difficult to distort when self-interested actors occupy roles within them.  Most fundamentally, we need a set of institutions that embody pursuit of the public good; that reflect citizen preferences; and that secure a just system of law for all citizens.

So what kinds of governance institutions are compatible with this list of facts and values?

This is where the mechanisms of constitutional electoral democracy come in. Western political theorists argue that a constitution sets the regulative framework for governance -- the fundamental legal protections defining citizenship and the scope and role of government. And electoral democracy permits citizens to express their preferences and enforce good performance by officials.  So policies are selected that correspond to the preferences of citizens; and they are implemented in good faith under the enforcement mechanism of representative electoral democracy.

But here is the more challenging question: are there other institutional arrangements that might fit these facts and values about as well? In particular, could we imagine a Confucian single-party state with an energetic anti-corruption office, an energetic and independent "investigative journalism" office, and a robust social survey office that serves the functions of gathering citizen preferences and concerns? Could such a system genuinely embody the public good in a hypothetical modern Asian society? In other words, could we imagine an administrative-authority system that effectively embodied the public good and protections of the fundamental interests and preferences of citizens? Could the "checks and balances" represented by an electoral system be established through other means?

It is easy to see objections to this hypothetical possibility; they largely come down to the problem of independence and effectiveness when a regulative office finds it necessary to criticize powerful officials or private persons. But it's worth asking the question of alternative governance design, and it's not inconceivable that solutions to these problems could be created.

(Here is an interesting collection of Tu Weiming's writings; Humanity and Self-Cultivation: Essays in Confucian Thought.)

Intangible services

Neoclassical economics presents a pretty simple theory of the equilibrium price of a manufactured good. This theory also extends to a theory of the wage for skilled and unskilled labor. We postulate production and demand curves, and the equilibrium price is the point where supply equals demand. The supply curve is influenced by factors governing the cost of production and therefore the level of profit created at a given production level and price, and the demand curve is influenced by subjective consumer preferences. An increase in demand for a good pushes up the price, thus triggering more production; and the price falls to a new equilibrium.

Wages are affected by this calculation because labor is a factor of production, and demand for labor at a given wage is influenced by the marginal product of labor. If the marginal product is greater than the wage the employer will hire another worker, increasing demand for labor and marginally increasing the wage. The equilibrium wage is the point at which the marginal product equals the wage.

Labor is not a homogeneous substance; the marginal product is affected by skill, intensity, and experience. So we should expect different wage curves for different segments of the labor force, with the wage rate for unskilled and inexperienced workers at the lowest level.  But because specialized labor is somewhat elastic in supply (through additional training) we would expect some degree of convergence between skilled and unskilled labor rates over moderate time periods.

How does this theory apply to intangible services where the quality of the product is difficult to measure? I'm thinking of a college education; how does a consumer decide between the education offered at a private university like Rice and the lower-cost alternative at UT-Arlington? But let's think of simpler examples -- for example, architectural services, family lawyers, or studio musicians. What are the factors that influence the price a supplier can charge in the marketplace?  Why do each of these sectors embody significantly tiered price structures?

Take architectural services. There is a wide range of fees charged by architectural firms, ranging from one-person firms designing single-family homes to multi-city firms charging much higher fees. There is demand for architectural services regionally and nationally. There is good information about suppliers and rates at the national level. And the supply of services is somewhat elastic -- more students will enter architecture school when the incomes they can expect are high. So why doesn't the simple logic of supply and demand imply convergence of prices for this service that is reasonably consistent and related to the cost of production of the service? Why are some elite firms able to retain a significant and permanent price premium? In other words, why don't we witness the commodification of architectural services along the lines of the auto industry, where firms compete aggressively on price?

I suppose some of the factors that stabilize this sort of multi-tier price system in services are fairly obvious. These might include brand and reputation; quality and prestige of professional service providers within the various firms; and depth and quality of referral networks.

Consider this thought experiment. RUNOFTHEMILL is an architectural firm of 30 professionals in the Rustbelt. TOPOFTHELINE is a firm of 200 professionals in San Francisco. Detailed quality assessment by the XYZ consulting firm estimates that RUNOFTHEMILL completes a wide range of midsize projects at roughly the same level of quality as TOPOFTHELINE. However, TOPOFTHELINE charges roughly twice what RUNOFTHEMILL charges for a project of comparable size. What are the mechanisms that preserve the price differential between the two firms? Why are rational business organizations willing to pay the premium to have their buildings designed by TOPOFTHELINE?

First, it is possible that TOPOFTHELINE has succeeded in positioning itself in the marketplace as a provider of superior quality. By hypothesis, this is untrue; but if potential buyers are persuaded of the quality advantage, they may choose TOPOFTHELINE over RUNOFTHEMILL in spite of the premium. This seems to be an inverted version of the "market for lemons": because the actual quality of the good is difficult to measure, the purchaser is forced to turn to other indicators as possible signals of quality. And this may lead the purchaser to pay more for the service than necessary.

Second, TOPOFTHELINE may have pursued a deliberate and successful strategy of recruitment of architects from the most respected schools in the world, whereas RUNOFTHEMILL may pay lower fees and may recruit equally capable but less prestigious professionals. Prospective clients may take the prestige of the staff as an indicator of the quality of the product, and may therefore be willing to pay the premium.  The observable prestige of the professional staff may serve as a surrogate for the inferred quality of the service.

Third, TOPOFTHELINE may have a brand that conveys significant prestige on its projects.  A company whose corporate offices are designed by TOPOFTHELINE may gain from that prestige, and the gain may justify the premium in spite of the additional cost.

Finally, it may be that the market for architectural services is highly segmented as a result of the networks of referrals that exist involving the two firms. TOPOFTHELINE exists in a network of premiere organizations, both providers and purchasers; and referrals and endorsements for TOPOFTHELINE support premium prices for its services. RUNOFTHEMILL has completed equally high-quality projects, but for a second tier of companies and consumers; so its referrals more or less automatically steer its services towards a tier of companies that are more likely to compete on price. So RUNOFTHEMILL's referrals generate lower average fees.

Several of these factors are inherently irrational grounds for accepting a price premium.  If purchasers had full information about quality and price, they would not pay a premium for the pedigrees of the professional staff, and they would not restrict their purchasing horizon to suppliers recommended by other elite firms.  Instead, they would go with the Walmart strategy: get the best product for the lowest price. So far, however, it seems that the markets for advanced and specialized services are fairly sticky when it comes to price, quality, and prestige.

Intangible services

Neoclassical economics presents a pretty simple theory of the equilibrium price of a manufactured good. This theory also extends to a theory of the wage for skilled and unskilled labor. We postulate production and demand curves, and the equilibrium price is the point where supply equals demand. The supply curve is influenced by factors governing the cost of production and therefore the level of profit created at a given production level and price, and the demand curve is influenced by subjective consumer preferences. An increase in demand for a good pushes up the price, thus triggering more production; and the price falls to a new equilibrium.

Wages are affected by this calculation because labor is a factor of production, and demand for labor at a given wage is influenced by the marginal product of labor. If the marginal product is greater than the wage the employer will hire another worker, increasing demand for labor and marginally increasing the wage. The equilibrium wage is the point at which the marginal product equals the wage.

Labor is not a homogeneous substance; the marginal product is affected by skill, intensity, and experience. So we should expect different wage curves for different segments of the labor force, with the wage rate for unskilled and inexperienced workers at the lowest level.  But because specialized labor is somewhat elastic in supply (through additional training) we would expect some degree of convergence between skilled and unskilled labor rates over moderate time periods.

How does this theory apply to intangible services where the quality of the product is difficult to measure? I'm thinking of a college education; how does a consumer decide between the education offered at a private university like Rice and the lower-cost alternative at UT-Arlington? But let's think of simpler examples -- for example, architectural services, family lawyers, or studio musicians. What are the factors that influence the price a supplier can charge in the marketplace?  Why do each of these sectors embody significantly tiered price structures?

Take architectural services. There is a wide range of fees charged by architectural firms, ranging from one-person firms designing single-family homes to multi-city firms charging much higher fees. There is demand for architectural services regionally and nationally. There is good information about suppliers and rates at the national level. And the supply of services is somewhat elastic -- more students will enter architecture school when the incomes they can expect are high. So why doesn't the simple logic of supply and demand imply convergence of prices for this service that is reasonably consistent and related to the cost of production of the service? Why are some elite firms able to retain a significant and permanent price premium? In other words, why don't we witness the commodification of architectural services along the lines of the auto industry, where firms compete aggressively on price?

I suppose some of the factors that stabilize this sort of multi-tier price system in services are fairly obvious. These might include brand and reputation; quality and prestige of professional service providers within the various firms; and depth and quality of referral networks.

Consider this thought experiment. RUNOFTHEMILL is an architectural firm of 30 professionals in the Rustbelt. TOPOFTHELINE is a firm of 200 professionals in San Francisco. Detailed quality assessment by the XYZ consulting firm estimates that RUNOFTHEMILL completes a wide range of midsize projects at roughly the same level of quality as TOPOFTHELINE. However, TOPOFTHELINE charges roughly twice what RUNOFTHEMILL charges for a project of comparable size. What are the mechanisms that preserve the price differential between the two firms? Why are rational business organizations willing to pay the premium to have their buildings designed by TOPOFTHELINE?

First, it is possible that TOPOFTHELINE has succeeded in positioning itself in the marketplace as a provider of superior quality. By hypothesis, this is untrue; but if potential buyers are persuaded of the quality advantage, they may choose TOPOFTHELINE over RUNOFTHEMILL in spite of the premium. This seems to be an inverted version of the "market for lemons": because the actual quality of the good is difficult to measure, the purchaser is forced to turn to other indicators as possible signals of quality. And this may lead the purchaser to pay more for the service than necessary.

Second, TOPOFTHELINE may have pursued a deliberate and successful strategy of recruitment of architects from the most respected schools in the world, whereas RUNOFTHEMILL may pay lower fees and may recruit equally capable but less prestigious professionals. Prospective clients may take the prestige of the staff as an indicator of the quality of the product, and may therefore be willing to pay the premium.  The observable prestige of the professional staff may serve as a surrogate for the inferred quality of the service.

Third, TOPOFTHELINE may have a brand that conveys significant prestige on its projects.  A company whose corporate offices are designed by TOPOFTHELINE may gain from that prestige, and the gain may justify the premium in spite of the additional cost.

Finally, it may be that the market for architectural services is highly segmented as a result of the networks of referrals that exist involving the two firms. TOPOFTHELINE exists in a network of premiere organizations, both providers and purchasers; and referrals and endorsements for TOPOFTHELINE support premium prices for its services. RUNOFTHEMILL has completed equally high-quality projects, but for a second tier of companies and consumers; so its referrals more or less automatically steer its services towards a tier of companies that are more likely to compete on price. So RUNOFTHEMILL's referrals generate lower average fees.

Several of these factors are inherently irrational grounds for accepting a price premium.  If purchasers had full information about quality and price, they would not pay a premium for the pedigrees of the professional staff, and they would not restrict their purchasing horizon to suppliers recommended by other elite firms.  Instead, they would go with the Walmart strategy: get the best product for the lowest price. So far, however, it seems that the markets for advanced and specialized services are fairly sticky when it comes to price, quality, and prestige.

Intangible services

Neoclassical economics presents a pretty simple theory of the equilibrium price of a manufactured good. This theory also extends to a theory of the wage for skilled and unskilled labor. We postulate production and demand curves, and the equilibrium price is the point where supply equals demand. The supply curve is influenced by factors governing the cost of production and therefore the level of profit created at a given production level and price, and the demand curve is influenced by subjective consumer preferences. An increase in demand for a good pushes up the price, thus triggering more production; and the price falls to a new equilibrium.

Wages are affected by this calculation because labor is a factor of production, and demand for labor at a given wage is influenced by the marginal product of labor. If the marginal product is greater than the wage the employer will hire another worker, increasing demand for labor and marginally increasing the wage. The equilibrium wage is the point at which the marginal product equals the wage.

Labor is not a homogeneous substance; the marginal product is affected by skill, intensity, and experience. So we should expect different wage curves for different segments of the labor force, with the wage rate for unskilled and inexperienced workers at the lowest level.  But because specialized labor is somewhat elastic in supply (through additional training) we would expect some degree of convergence between skilled and unskilled labor rates over moderate time periods.

How does this theory apply to intangible services where the quality of the product is difficult to measure? I'm thinking of a college education; how does a consumer decide between the education offered at a private university like Rice and the lower-cost alternative at UT-Arlington? But let's think of simpler examples -- for example, architectural services, family lawyers, or studio musicians. What are the factors that influence the price a supplier can charge in the marketplace?  Why do each of these sectors embody significantly tiered price structures?

Take architectural services. There is a wide range of fees charged by architectural firms, ranging from one-person firms designing single-family homes to multi-city firms charging much higher fees. There is demand for architectural services regionally and nationally. There is good information about suppliers and rates at the national level. And the supply of services is somewhat elastic -- more students will enter architecture school when the incomes they can expect are high. So why doesn't the simple logic of supply and demand imply convergence of prices for this service that is reasonably consistent and related to the cost of production of the service? Why are some elite firms able to retain a significant and permanent price premium? In other words, why don't we witness the commodification of architectural services along the lines of the auto industry, where firms compete aggressively on price?

I suppose some of the factors that stabilize this sort of multi-tier price system in services are fairly obvious. These might include brand and reputation; quality and prestige of professional service providers within the various firms; and depth and quality of referral networks.

Consider this thought experiment. RUNOFTHEMILL is an architectural firm of 30 professionals in the Rustbelt. TOPOFTHELINE is a firm of 200 professionals in San Francisco. Detailed quality assessment by the XYZ consulting firm estimates that RUNOFTHEMILL completes a wide range of midsize projects at roughly the same level of quality as TOPOFTHELINE. However, TOPOFTHELINE charges roughly twice what RUNOFTHEMILL charges for a project of comparable size. What are the mechanisms that preserve the price differential between the two firms? Why are rational business organizations willing to pay the premium to have their buildings designed by TOPOFTHELINE?

First, it is possible that TOPOFTHELINE has succeeded in positioning itself in the marketplace as a provider of superior quality. By hypothesis, this is untrue; but if potential buyers are persuaded of the quality advantage, they may choose TOPOFTHELINE over RUNOFTHEMILL in spite of the premium. This seems to be an inverted version of the "market for lemons": because the actual quality of the good is difficult to measure, the purchaser is forced to turn to other indicators as possible signals of quality. And this may lead the purchaser to pay more for the service than necessary.

Second, TOPOFTHELINE may have pursued a deliberate and successful strategy of recruitment of architects from the most respected schools in the world, whereas RUNOFTHEMILL may pay lower fees and may recruit equally capable but less prestigious professionals. Prospective clients may take the prestige of the staff as an indicator of the quality of the product, and may therefore be willing to pay the premium.  The observable prestige of the professional staff may serve as a surrogate for the inferred quality of the service.

Third, TOPOFTHELINE may have a brand that conveys significant prestige on its projects.  A company whose corporate offices are designed by TOPOFTHELINE may gain from that prestige, and the gain may justify the premium in spite of the additional cost.

Finally, it may be that the market for architectural services is highly segmented as a result of the networks of referrals that exist involving the two firms. TOPOFTHELINE exists in a network of premiere organizations, both providers and purchasers; and referrals and endorsements for TOPOFTHELINE support premium prices for its services. RUNOFTHEMILL has completed equally high-quality projects, but for a second tier of companies and consumers; so its referrals more or less automatically steer its services towards a tier of companies that are more likely to compete on price. So RUNOFTHEMILL's referrals generate lower average fees.

Several of these factors are inherently irrational grounds for accepting a price premium.  If purchasers had full information about quality and price, they would not pay a premium for the pedigrees of the professional staff, and they would not restrict their purchasing horizon to suppliers recommended by other elite firms.  Instead, they would go with the Walmart strategy: get the best product for the lowest price. So far, however, it seems that the markets for advanced and specialized services are fairly sticky when it comes to price, quality, and prestige.

System changes in healthcare

One of the largest and most interesting processes of change going on in the United States today is the rapid redesign and adjustment of the American healthcare system. A key driver is this spring's passage of the Patient Protection and Affordable Care Act (PPACA), but the more fundamental causes are the twin crises we face for access and rising cost for health coverage. Somehow the country needs to find a way of including the whole population within the insured population, and we need to find ways of reducing the rate of growth of aggregate and per capita healthcare expenditures. PPACA is aimed at addressing both crises, and they are urgent.

Healthcare in the United States is provided through doctors, physician groups, and hospitals, organized into regional health systems. A given region typically has a number of hospital systems, non-profit and profit, and physician groups ranging in size from one to hundreds of physicians. And many experts describe existing health systems and hospitals as homebrew organizations that haven't changed fundamentally in thirty years. The current environment is forcing change for quality, health outcomes, and cost.

So who is forcing the changes? The requirements of the healthcare reform legislation (PPACA) are part of the answer. But other change drivers are large employers who are purchasers of healthcare services for their employees and the insurers who directly pay for services. A particularly important player is the Voluntary Employee Benefits Association trust (VEBA), a type of organization created by Federal law to administer large benefit pools. The United Auto Workers VEBA itself expends $4.6 billion annually in support of healthcare for its retirees, and it is actively managing plans and contracts so as to achieve sustainable spending for the 800,000 retirees in its pool (link). Health systems, hospital administrators, and physician group leaders are actively seeking ways of adjusting to the imminent future in the healthcare space.

The diagnoses of failure in the healthcare system often focus on a cluster of problems.

• Poorly aligned incentives for patients, physicians, and hospitals
• Incentives don't create behavior of all parties leading to greater health and lower cost
• Lack of focus on health rather than illness
• Lack of focus on the health of a population rather than a group of clients
• Lack of standardization of process within healthcare systems
• Lack of Electronic Medical Records
• Failure to involve the patient in responsibility for his/her health

The problem from the health system's point of view often comes down to reimbursement and revenue. Medicare and Medicaid reimbursement levels don't cover the costs of care, and hospital systems have large obligations for indigent (non-reimbursed) care. So hospital administrators and physician leaders face the imperative of squeezing costs out of their system while maintaining and enhancing quality and patient safety.  More and more urban hospitals are approaching a critical financial status as a result.

Payers -- basically, the companies that pay for health insurance for their employees -- see the problem as one of rapidly rising costs and assuring quality. So their effort is to place pressure on providers and insurers to contain costs, to shift part of the cost to the employee, and to create effective wellness plans that incentivize employees to adopt healthier lifestyles. Payers and insurers are attempting to make highly focused use of data about providers, cost, and health outcomes to permit evaluation of health systems and doctors and their practices. That data is available in voluminous quantities, and it will allow payers to distinguish strongly between more and less efficient health systems.

So what are some of the strategies currently being pursued by system administrators to allow their systems to survive in the new fiscal and regulatory environment? The mantra is the patient-centered medical home. Systems are seeking improvements in coordination of health care for the patient, quarterbacked by the primary care physician; a shift of emphasis towards wellness for the population rather than disease intervention; improvements in process efficiency; close attention to cost centers; competition for patients and referrals within the region; development of recognized specialty areas with higher margins and reimbursement rates; and implementation of the Electronic Medical Record and all the processes that need to surround this technology. Another visible strategy around the country is consolidation, as more successful hospitals absorb or merge with less successful ones. The goal is to create a system of "integrated and accountable care," achieving both goals of quality and cost effectiveness.

One of the current areas of focus is the concept of an "Accountable Care Organization," a concept introduced through the PPACA legislation but not explicitly defined. (Here is a 2009 discussion paper by the Urban Institute.)  It is a level of organization that will figure crucially in the administration of future payment systems and regulations, and health systems are attempting to formulate their own ACOs. Here is a working definition:

An ACO is a group of providers working as a team taking fiscal responsibility for outcomes and costs for a defined population.

If one is interested in the fate of a particular regional healthcare system or hospital, now is the time to be paying close attention to the planning and reform its leaders and physicians are currently carrying out. The stakes are very high. Tthe business environment is changing rapidly and abruptly, and some community hospitals and health systems will not survive. Moreover, some experts expect a significant decline in the percentage of employers who offer health coverage -- bad news for currently insured workers.

So the next few years portend some very deep changes for almost all Americans when it comes to healthcare.

(Here's a link to a position paper by the Robert Wood Johnson Foundation.  Thanks to Maxine for the link.)

System changes in healthcare

One of the largest and most interesting processes of change going on in the United States today is the rapid redesign and adjustment of the American healthcare system. A key driver is this spring's passage of the Patient Protection and Affordable Care Act (PPACA), but the more fundamental causes are the twin crises we face for access and rising cost for health coverage. Somehow the country needs to find a way of including the whole population within the insured population, and we need to find ways of reducing the rate of growth of aggregate and per capita healthcare expenditures. PPACA is aimed at addressing both crises, and they are urgent.

Healthcare in the United States is provided through doctors, physician groups, and hospitals, organized into regional health systems. A given region typically has a number of hospital systems, non-profit and profit, and physician groups ranging in size from one to hundreds of physicians. And many experts describe existing health systems and hospitals as homebrew organizations that haven't changed fundamentally in thirty years. The current environment is forcing change for quality, health outcomes, and cost.

So who is forcing the changes? The requirements of the healthcare reform legislation (PPACA) are part of the answer. But other change drivers are large employers who are purchasers of healthcare services for their employees and the insurers who directly pay for services. A particularly important player is the Voluntary Employee Benefits Association trust (VEBA), a type of organization created by Federal law to administer large benefit pools. The United Auto Workers VEBA itself expends $4.6 billion annually in support of healthcare for its retirees, and it is actively managing plans and contracts so as to achieve sustainable spending for the 800,000 retirees in its pool (link). Health systems, hospital administrators, and physician group leaders are actively seeking ways of adjusting to the imminent future in the healthcare space.

The diagnoses of failure in the healthcare system often focus on a cluster of problems.

• Poorly aligned incentives for patients, physicians, and hospitals
• Incentives don't create behavior of all parties leading to greater health and lower cost
• Lack of focus on health rather than illness
• Lack of focus on the health of a population rather than a group of clients
• Lack of standardization of process within healthcare systems
• Lack of Electronic Medical Records
• Failure to involve the patient in responsibility for his/her health

The problem from the health system's point of view often comes down to reimbursement and revenue. Medicare and Medicaid reimbursement levels don't cover the costs of care, and hospital systems have large obligations for indigent (non-reimbursed) care. So hospital administrators and physician leaders face the imperative of squeezing costs out of their system while maintaining and enhancing quality and patient safety.  More and more urban hospitals are approaching a critical financial status as a result.

Payers -- basically, the companies that pay for health insurance for their employees -- see the problem as one of rapidly rising costs and assuring quality. So their effort is to place pressure on providers and insurers to contain costs, to shift part of the cost to the employee, and to create effective wellness plans that incentivize employees to adopt healthier lifestyles. Payers and insurers are attempting to make highly focused use of data about providers, cost, and health outcomes to permit evaluation of health systems and doctors and their practices. That data is available in voluminous quantities, and it will allow payers to distinguish strongly between more and less efficient health systems.

So what are some of the strategies currently being pursued by system administrators to allow their systems to survive in the new fiscal and regulatory environment? The mantra is the patient-centered medical home. Systems are seeking improvements in coordination of health care for the patient, quarterbacked by the primary care physician; a shift of emphasis towards wellness for the population rather than disease intervention; improvements in process efficiency; close attention to cost centers; competition for patients and referrals within the region; development of recognized specialty areas with higher margins and reimbursement rates; and implementation of the Electronic Medical Record and all the processes that need to surround this technology. Another visible strategy around the country is consolidation, as more successful hospitals absorb or merge with less successful ones. The goal is to create a system of "integrated and accountable care," achieving both goals of quality and cost effectiveness.

One of the current areas of focus is the concept of an "Accountable Care Organization," a concept introduced through the PPACA legislation but not explicitly defined. (Here is a 2009 discussion paper by the Urban Institute.)  It is a level of organization that will figure crucially in the administration of future payment systems and regulations, and health systems are attempting to formulate their own ACOs. Here is a working definition:

An ACO is a group of providers working as a team taking fiscal responsibility for outcomes and costs for a defined population.

If one is interested in the fate of a particular regional healthcare system or hospital, now is the time to be paying close attention to the planning and reform its leaders and physicians are currently carrying out. The stakes are very high. Tthe business environment is changing rapidly and abruptly, and some community hospitals and health systems will not survive. Moreover, some experts expect a significant decline in the percentage of employers who offer health coverage -- bad news for currently insured workers.

So the next few years portend some very deep changes for almost all Americans when it comes to healthcare.

(Here's a link to a position paper by the Robert Wood Johnson Foundation.  Thanks to Maxine for the link.)

System changes in healthcare

One of the largest and most interesting processes of change going on in the United States today is the rapid redesign and adjustment of the American healthcare system. A key driver is this spring's passage of the Patient Protection and Affordable Care Act (PPACA), but the more fundamental causes are the twin crises we face for access and rising cost for health coverage. Somehow the country needs to find a way of including the whole population within the insured population, and we need to find ways of reducing the rate of growth of aggregate and per capita healthcare expenditures. PPACA is aimed at addressing both crises, and they are urgent.

Healthcare in the United States is provided through doctors, physician groups, and hospitals, organized into regional health systems. A given region typically has a number of hospital systems, non-profit and profit, and physician groups ranging in size from one to hundreds of physicians. And many experts describe existing health systems and hospitals as homebrew organizations that haven't changed fundamentally in thirty years. The current environment is forcing change for quality, health outcomes, and cost.

So who is forcing the changes? The requirements of the healthcare reform legislation (PPACA) are part of the answer. But other change drivers are large employers who are purchasers of healthcare services for their employees and the insurers who directly pay for services. A particularly important player is the Voluntary Employee Benefits Association trust (VEBA), a type of organization created by Federal law to administer large benefit pools. The United Auto Workers VEBA itself expends $4.6 billion annually in support of healthcare for its retirees, and it is actively managing plans and contracts so as to achieve sustainable spending for the 800,000 retirees in its pool (link). Health systems, hospital administrators, and physician group leaders are actively seeking ways of adjusting to the imminent future in the healthcare space.

The diagnoses of failure in the healthcare system often focus on a cluster of problems.

• Poorly aligned incentives for patients, physicians, and hospitals
• Incentives don't create behavior of all parties leading to greater health and lower cost
• Lack of focus on health rather than illness
• Lack of focus on the health of a population rather than a group of clients
• Lack of standardization of process within healthcare systems
• Lack of Electronic Medical Records
• Failure to involve the patient in responsibility for his/her health

The problem from the health system's point of view often comes down to reimbursement and revenue. Medicare and Medicaid reimbursement levels don't cover the costs of care, and hospital systems have large obligations for indigent (non-reimbursed) care. So hospital administrators and physician leaders face the imperative of squeezing costs out of their system while maintaining and enhancing quality and patient safety.  More and more urban hospitals are approaching a critical financial status as a result.

Payers -- basically, the companies that pay for health insurance for their employees -- see the problem as one of rapidly rising costs and assuring quality. So their effort is to place pressure on providers and insurers to contain costs, to shift part of the cost to the employee, and to create effective wellness plans that incentivize employees to adopt healthier lifestyles. Payers and insurers are attempting to make highly focused use of data about providers, cost, and health outcomes to permit evaluation of health systems and doctors and their practices. That data is available in voluminous quantities, and it will allow payers to distinguish strongly between more and less efficient health systems.

So what are some of the strategies currently being pursued by system administrators to allow their systems to survive in the new fiscal and regulatory environment? The mantra is the patient-centered medical home. Systems are seeking improvements in coordination of health care for the patient, quarterbacked by the primary care physician; a shift of emphasis towards wellness for the population rather than disease intervention; improvements in process efficiency; close attention to cost centers; competition for patients and referrals within the region; development of recognized specialty areas with higher margins and reimbursement rates; and implementation of the Electronic Medical Record and all the processes that need to surround this technology. Another visible strategy around the country is consolidation, as more successful hospitals absorb or merge with less successful ones. The goal is to create a system of "integrated and accountable care," achieving both goals of quality and cost effectiveness.

One of the current areas of focus is the concept of an "Accountable Care Organization," a concept introduced through the PPACA legislation but not explicitly defined. (Here is a 2009 discussion paper by the Urban Institute.)  It is a level of organization that will figure crucially in the administration of future payment systems and regulations, and health systems are attempting to formulate their own ACOs. Here is a working definition:

An ACO is a group of providers working as a team taking fiscal responsibility for outcomes and costs for a defined population.

If one is interested in the fate of a particular regional healthcare system or hospital, now is the time to be paying close attention to the planning and reform its leaders and physicians are currently carrying out. The stakes are very high. Tthe business environment is changing rapidly and abruptly, and some community hospitals and health systems will not survive. Moreover, some experts expect a significant decline in the percentage of employers who offer health coverage -- bad news for currently insured workers.

So the next few years portend some very deep changes for almost all Americans when it comes to healthcare.

(Here's a link to a position paper by the Robert Wood Johnson Foundation.  Thanks to Maxine for the link.)

Works councils and US labor relations

image: Diego Rivera, Rouge Plant mural, Detroit Institute of Arts

The United States has one of the lowest rates of union representation of all developed countries. The 1994 level of unionized workers in the US had fallen to about 12 percent of private sector employment, and the trend is downward.  And the sole institutional form through which representation occurs in the US context is the union.  So the vast majority of American workers are left with no formal representation within the firm when it comes to wages, benefits, or work practices.

This situation contrasts strikingly with the labor-management institutions in place in much of Europe and Japan. In most other countries legislation establishes the opportunity or the mandate for a second form of worker representation within the workplace, the works council. Industry-wide unions establish wage levels; public policy stipulates the level of the "social wage"; and works councils provide an institutionalized context in which management and employees consult with each other, exchange workplace information, and work out firm-specific implementations of industry-wide agreements.  And, as Kathleen Thelen demonstrates, differences in the institutions surrounding labor in a market society can have major effects on important social and economic factors in the societies in which they are embedded (How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan).

Joel Rogers and Wolfgang Streek's Works Councils: Consultation, Representation, and Cooperation in Industrial Relations is the result of an extensive NBER cross-country study of the economic and social effects of broadly implemented works councils in Europe and Japan. The bottom line is fairly clear: where they exist, these formal institutions of labor representation within the firm have clear theoretical and empirical benefits for productivity, worker skill levels, and willing patterns of cooperation between workers and management. (Richard Freeman's America Works: Critical Thoughts on the Exceptional U.S. Labor Market (2007) is a more general discussion of the singular nature of the American labor system.)

Generally speaking a works council system can be defined in these terms:

We define works councils as institutionalized bodies for representative communication between a single employer ("management") and the employees ("workforce") of a single plant or enterprise ("workplace"). (Rogers and Streek, 6)

This involves several aspects:

• It is a system of mandatory consultation by management to give organized expression to the considered views of employees to contemplated changes.
• Works councils do not have the authority to negotiate for wages and benefits; this is typically done by sectoral unions.
• Works councils are typically firm-specific, limited to consultation and exchange of information about local decision-making.

The benefits associated with works councils in Europe and Japan are many and well documented  More specifically, the contributors found that works councils facilitate a number of welfare-enhancing outcomes:

• Exchange of information
• Enforcement of regulations
• Improvement of mutual trust and labor productivity
• Greater democracy and freedom for workers
• Enhancement of productivity
• Incentives for both management and employees to increase skill levels

Each of these outcomes is a substantial benefit within a market-based economic system. Take the issue of the enforcement of regulations, including OSHA rules, environmental regulations, and food safety assurance regimes. The inspectorate of the agencies responsible for these regulatory regimes cannot be sized to the levels needed to ensure enforcement through inspection and fines. There are simply too many workplaces and firms. And the only other current mechanism, private litigation when violations lead to individual damages, is too sporadic to constitute an effective enforcement regime.  So, for example, workplace accident rates are dramatically higher in the United States than Japan and Sweden; the US death rate is 3.5 times that of Japan and 5.8 times that of Sweden (398).  Works councils specifically empowered to gain knowledge about the regulatory requirements combined with detailed workplace knowledge can change this situation.

Or take the area of a cooperative exchange of information within the firm. When various actors have the opportunity and incentive to hoard information to further their particular interests -- whether management or employee -- then decisions will be faulty, efficiencies will be overlooked, and the production process will be less efficient than it could be. Works councils give employees a greater degree of confidence and trust in management and therefore a greater willingness to share useful workplace information. And management has a legal mandate to share pertinent information and to consult with employees about prospective decisions. These intersecting incentives and obligations promote a valuable cooperative exchange of information.

Richard Freeman and Edward Lazear go into detail in laying out the reasons grounded in microeconomics for expecting that works councils will be welfare-enhancing but need to be mandatory rather than voluntary.  Central to their analysis is the issue of information flow within a firm:

Economic theory recognizes that asymmetries in information between labor and management can produce inefficient social outcomes.  Different levels of a firm's hierarchy can use private information opportunistically, possibly through coalitions against other levels of the hierarchy. ...  Legal requirements that management disclose information to elected works councils raises the possibility that councils may help resolve the communication problem and raise rents. (33)

They also emphasize the benefits for quality of decision making that flow from the obligation to consult with employees.  "Consultation can increase enterprise surplus when workers offer solutions to firm problems that management fails to see ... and when management and labor together discover solutions to company problems that neither would have conceived separately" (44).

On first principles it would seem that the US economy would be better served by a system that incorporates works councils as a supplement to union representation. And workers are likely to be benefited in very specific ways --greater satisfaction in the workplace, greater involvement in a high-skills (and high-wage) economy, and a greater level of democratic equality. So what stands in the way of reforms leading in this direction? Joel Rogers considers this question in discouraging detail in the concluding chapter. The foundations of US labor law directly prohibit these forms of workplace representation, and the political will for implementing these policy changes is lacking on both sides. And it is difficult to see a gradual process of evolution in this direction based on voluntary establishment of these institutions by employers; the history of labor relations after both world wars suggest that these forms tend to extinguish when based on voluntary choices by enterprise owners. So it is difficult to see where the political will for this major reform of US labor relations might originate.

There is another consideration that favors the establishment of works councils that is not highlighted in this report -- the terrible situation of workers in the informal sector in the United States. Restaurant workers, day laborers, taxi drivers, non-unionized hotel workers, nannies, and housekeepers have very little ability to protect their interests and defend their legal rights. Health and safety standards apply to informal workplaces; all workers have a right to receive their wages in a timely way; and physical or verbal abuse should not be accepted in any workplace. But informal sector workers have very few means at their disposal to secure their rights in even these basic ways. Often undocumented, always in desperate need for a job, they are often at the mercy of bosses and managers who take advantage of them. There are emerging efforts to create analogs for works councils to help workers in these sectors to defend their rights and their livelihoods.  Intriguing experiments have emerged; for example, Restaurant Opportunity Centers in several cities (link) and Domestic Workers United in New York City (link). See Janice Fine, Worker Centers: Organizing Communities at the Edge of the Dream.  Here is an extended description of the book (link) and here is a link to her Economic Policy Institute working paper, "Worker Centers: Organizing Communities at the Edge of the Dream".  Also of interest is the website for WorkingAmerica, the policy organization associated with the AFL-CIO.  Progress along these lines would sigificantly improve basic features of social justice in our society.