The importance of learning and competition for institutions

By Rens Edwards

In class we discussed three characteristics that make path-dependency effects in politics intense. We touched upon the shorter time horizons and the strong status-quo bias in politics extensively, but we skimmed over the absence of efficiency-enhancing mechanisms of competition and learning. The latter could use some clarification through an example.

Competition and learning as efficiency-enhancing mechanisms can appropriately be applied to economics. In financial markets, firms contend with each other to become the leader in a particular sector, which creates competition. Due to the existing competition, more efficient firms develop which eliminate the firms that cannot keep up. This process causes “auto correction” within the financial sectors. Learning processes also stimulate companies to strive for the highest efficiency. Firms learn from other firms and from themselves to become more efficient.

In politics however, competition and learning are not as straightforward as in economics. Competition does occur during elections, but generally political institutions do not compete with each other to become more efficient. Learning processes occur sometimes when institutions receive feedback on newly implemented policies, but this happens much less frequently than efficiency corrections in economics.

Political institutions in the world of football are a good illustration of inefficient organizations. The FIFA is the main organization, which consists of six sub-organizations including the UEFA. Despite the existence of multiple organizational bodies, almost no corrections have taken place to make the FIFA (or its subdivisions) more efficient. The FIFA simply stayed on the same unethical path, until finally an intervention occurred recently forcing the FIFA to make drastic institutional changes.

The absence of competition and learning is clear in “permissive” political environments like the FIFA. Political institutions generally lack auto-corrective mechanisms, making them more susceptible of pursuing the wrong track.