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Thursday, November 12, 2015

The limits of grassroots empowerment

Citizens -> Government

Ever since Plato, we have known that direct democracy does not work well. When faced with a question like one-rank-one-pension, we will not get the right answer by asking the people. The mechanism that works better is to have a representative democracy, also termed a "republic", where the people elect representatives who write law. The recourse to referendums where the people vote is a bad way to organise things.

With modern technology, the transactions costs of voting are no longer a barrier. It's quite easy to conceive of mobile phones offering one or two resolutions on which the people vote, every day. However, the voice of the people is not a good way to run a country, as the people do not have knowledge of the machinery of government. The people should be involved at a deeper question of values and objectives. The people should elect representatives who will pursue objectives that the people like. The voice of citizens should shape the priorities of their representatives, but it is the representatives should get engaged with the wonkish details.

Shareholders -> Firms

The same three step process is found with firms. Shareholders are the ultimate beneficiaries of well run firms. But shareholders are seldom the right source of decisions about the management of firms. Shareholders should recruit a board of directors who would then be akin to the legislature of the firm.

With modern technology, the transactions costs of voting are no longer a barrier. It's quite easy to conceive of mobile phones offering one or two resolutions on which the shareholders vote, everey day. However, the choice of shareholders is not a good way to run a company, as shareholders do not have knowledge of the machinery of the firm.

Customers -> Firms

Josh Dzieza has an article in The Verge about customers rating employees of firms, and thereby working as supervisors of employees, which links to similar themes. The article has an element of outrage about micromanagement of employees, which I don't share. All management is about principal-agent problems, and if customers help improve monitoring of employees, in general, that's a good thing. (In equilibrium, more intrusive supervision may go with higher wages, if many employees dislike that level of monitoring).

But I think there is a deeper point here which is worth mulling about. Is putting customers in charge a bit like putting shareholders in charge or putting voters in charge? Customers may not always choose things that are best for organising production. Managers, and not customers, have the full picture of how production is organised. The best price / performance for customers may not come from giving too much power to customers.


Ubiquitous computer and telecom technology has made it possible to organise the world in ways that empower the grassroots. To many people, this is instantly attractive, as a way of breaking away from the hierarchical power structure of the pre-technological world. We are always sympathetic to voters or shareholders or consumers being empowered with mobile phones.

There are places where hyper-empowered citizens are a good thing. But this is not true in general. Most of the time, we will need management who take responsibility for organising things in ways that are good for voters, shareholders or consumers.

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