Guarding the guardians, or whipping oneself?

Juvenal, image by S. H. Gimber, Public domain, via Wikimedia Commons

There’s a new wrinkle on the saying of Juvenal (1999), the ancient Roman poet, satirist, and maybe cynic, perhaps the most ancient puzzle of governance, at least in the Western world: “Who shall guard the guardians?”

Daniel Ferreira and Jin Li, finance professors at the London School of Economics and the University of Hong Kong, don’t invoke Juvenal directly, but they trawl through some hallmark bits of economic and legal theory. Their new working paper (Ferreira & Li, 2024) begins by quoting a 40-year-old observation from China:

My own favorite example is riverboat pulling in China before the communist regime, when a large group of workers marched along the shore towing a good-sized wooden boat. The unique interest of this example is that the collaborators actually agreed to the hiring of a monitor to whip them (Cheung, 1983, p. 8).

The Cheung paper, in a law journal, was a reappraisal of a famous bit of economic theory, Ronald Coase’s musings on the “The Theory of the Firm” almost 90 years ago. Coase (1937) asked us to think of companies as a response to inefficiencies in markets. People come together in firms because it’s easier than managing all the individual transactions those people would need to conduct with each other. Cheung then raises the question of how such collective enterprises keep themselves in line. Ferreira and Li push it a notch further by showing the paradoxes when organisations seek to act autonomously, without reference to some vaguely higher authority, like a state, as regulator. In certain circumstances, hierarchies are more efficient than markets. But what if you want to operate outside a hierarchy?

Autonomy is a power, these days, that even few states possess. I recall reading recently that only the United States and China have even a semblance of autonomy, militarily and economically, and even they pay homage to the United Nations as an entity that might, just, guard the guardians of global peace and prosperity. The “MAD” policy of Mutually Assured Destruction that kept peace during the Cold War looks more fragile in a time when more states have the weaponry, and more leaders seem to lack the will of self-restraint that riverboat pulling required in pre-Communist China. And then there are the intractable problems that even self-restraint of the nearly autonomous cannot address, climate perhaps first among them.

What can we learn, then, from decades and centuries of puzzling over “how to govern”? Looking in the smaller context of organisations, Ferreira and Li write: “Third-party monitoring is an efficient solution only if the third party is honest, competent, and inexpensive.” It often isn’t. If organisations want to govern themselves, they can create, in effect, contracts with their members in which enforcement is conducted by other members. That power is then limited by the ability to exit the organisation and its contracts.

This reminds me of the puzzle that Albert Hirschman (1970) explored: It’s easy – at least in open and liberal societies – to imagine leaving a company if your voice isn’t being heard. Finding the exit from a state is possible, but more problematic. It’s made even more difficult when emotions tie you to a state or organisation, that is, when loyalty kicks in.

Ferreira and Li’s mental experiment concludes with a trilemma:

… the goals of autonomy, decentralization, and efficiency typically conflict with one another. If we insist on autonomy, there is a trade-off between efficiency and decentralization. If decentralization is a goal in itself, efficiency or autonomy must be compromised. If efficiency is the goal, we cannot have both autonomy and decentralization.

The resulting “paradox of power” is this: “by letting the strong party abuse his/her power, the weak party gains power over the strong party via exiting,” they write. And thus, the abuse of power damages the powerful, providing an incentive for self-restraint.

In organisations. Maybe.

But only as long as there’s an exit. And there’s the rub. Who shall guard the guardians when there’s a whip and no exit? States cannot easily close the exits, as the experiences of 1989 in eastern Europe eventually showed and the exodus from autocratic states to more liberal ones show. But that attempt at a solution depends on other states opening the entrance. Problem still not solved.

NB: Let’s recall that Juvenal’s puzzle wasn’t about states, corporations, or organisations of any sort. It was about families, a puzzle of governance even less tractable than states.

Cheung, S. N. S. (1983). The Contractual Nature of the Firm. The Journal of Law & Economics, 26(1), 1-21. doi:10.1086/467023

Coase, R. H. (1937). The Theory of the Firm. Economica, 4(16), 386-405. doi:10.1111/j.1468-0335.1937.tb00002.x

Ferreira, D., & Li, J. (2024, March). Governance and Management of Autonomous Organizations. European Corporate Governance Institute – Finance Working Paper No. 968/2024. Retrieved from https://ssrn.com/abstract=4746904

Hirschman, A. O. (1970). Exit, voice, and loyalty: Responses to decline in firms, organizations, and states. Cambridge, MA: Harvard University Press.

Juvenal. (1999, January). Satire 6. Internet Ancient History Sourcebook. Retrieved from http://www.fordham.edu/halsall/ancient/juvenal-satvi.asp