Hirschman and the Governing Dynamics of Political Systems

The Herfindahl-Hirschman Index is an indicator for measuring the amount of competition in an economic sector proposed in 1945 by Albert Hirschman, and again, independently, in 1950 by Orris Herfindahl, computed as: 

Strikingly, this formulation is nothing more than the l2 norm, or Euclidean distance, of the parameter space, hinting at a simpler mathematical interpretation beneath the surface. 

Sure enough, if you consider an economy’s given industry as an N-vector composed of the market shares of the N firms operating in the industry, the HHI is the l2 magnitude of the vector. Moreover, by construction, the set of these valid industry-N-vectors is identically the N-1 regular simplex. 

Trivially, this proves geometrically that 1) HHI is bounded by 1, since the regular simplex is contained within the unit ball, 2) our metric is strictly-increasing away from the central point, where all firms have equal market share, and 3) the score is maximized at simplex vertices, where the simplex intersects the unit ball. Intuitively, properties 2 and 3 precisely embody our physical expectations of a measure for market competition. 

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In Western democracy, I was born into a system where we assume progress is driven by popular majority through and within the existing political framework. This is a fairly recent development, however — a simple look back at the historical notion of “representative” government illustrates a tenuous use of “representative” in the handful of cases it has been implemented — and while this is an enormous privilege, I want to spare a thought to explore the possibility of an unlikely consequence of this paradigm shift.

In his landmark text Exit, Voice, and Loyalty, political economist Hirschman posits two dimensions by which individuals shape their political landscape, immediately apparent from the title: 1) Voice, to advocate reform within the existing system, and 2) Exit, to mobilize and leave the system entirely. The author argues that these two features span the game-theoretic set of political actions and that the interplay between these two forces settles at a stable arrangement of government and its citizens. Additionally, Hirschman articulates the role of loyalty in predicting behavior, with high loyalty biasing individuals away from choosing to exit, and, similarly, the relative difficulty of the two options under the existing government predisposing agents to one or the other. 

In this way, government structure influences both first and second order conditions, setting parameters on the very factors that determine the state through time. This can be done deliberately, to exercise control, as in the case of medieval Europe, where it was illegal for serfs to leave his master’s property, or incidentally as a result of a highly loyal or patriotic citizenry. 

For a while now, I’ve wondered about the predictors of social reform, and the path civilization has taken to realize liberties I take for granted, and after some digging, I found Hirschman’s work to resonate with fragments of ideas I had previously but was never able to connect. For this reason I wanted to explore the implications of Exit, Voice, and Loyalty in a post in an attempt to structure my thoughts. 

The end of WWI was signified by the ratification of the Treaty of Versailles, a measure intended to usher in an era of peace in Europe by establishing guardrails in the form of Wilson’s League of Nations and rein-in the belligerent Germany through demilitarization. For its part in signing the treaty, war-torn Germany — coerced into signing the punitive terms — was forced to pay billions in reparations, accepting sole responsibility for the war, as well as cede land holdings. 

The outcome? Impatient as Germany was unable to make good on its extortionate reparation payments, France and Belgium seized German mining operations in the Ruhr valley as collateral, prompting strikes in the mines. As a sign of solidarity, the Weimar government vowed to honor the wages of some two million striking workers despite the country’s dire fiscal condition by printing excess banknotes. This paired with the reduced productivity in the coal supply resulted in runaway inflation, culminating in the issuance of a 100 trillion Reichsmarks note, pummeling Mittelstand (middle-class) wealth and shattering any remaining confidence of the public in its government. 

Too poor to leave, and faced with an inefficacious government, the people of the Weimar Republic turned to more incendiary means: an attempted coup by the National Socialist (Nazi) party led by Adolf Hitler in November 1923 a sign of things to come.

In a twist of fate, the Treaty of Versailles had made Europe a markedly less stable place, lighting the fuse for an upheaval of the precarious Weimar Republic by not respecting the natural forces of the political economy.

Hirschman describes emigration as a safety-valve in regulating political stability by providing the most disgruntled citizens a peaceful way out; suppress this vent, however, and you have yourself a time bomb. Without the option or desire to leave, a nation’s only hope for stability is to be able to keep up with the sometimes conflicting demands of its public by progressing and finding compromise at an adaptive rate. This means having a sufficiently agile legislative process to be able to accommodate rapid reform. 

Although this may sound plausible, this is in fact a flawed premise in our modern concept of a democratic state, and is precisely the predicament in which America finds itself.

Front and center to the American ideal is the concept that our government is created for, by, and of the people, and implicit to this is the promise that any individual can make a difference. To this effect, the American system has been the stage for numerous hallmark advancements in social equality over the years, with suffrage, desegregation, and the recognition of gay marriage all stemming from grass roots movements driving (eventual) legislative change. 

As an American, I take great pride in this, and feel an enormous sense of pride in the belief that it is my duty to enact the change I want in our system; as a result I largely dismiss emigration or renouncing my citizenship as “the easy way out” — I am, and will always be an American, for better or worse. Cliche as it may be, I am sure that I am not alone in this belief.

Fundamentally, however, we need to acknowledge that our system was not built for this, nor would this necessarily be an appropriate objective for a nation the size of the modern United States. The division of power baked into the very structure of the US government is antithetical to wide-scale reforms precisely to prevent would-be usurpers and ensure the longevity of the democracy. In this sense, the three tiered-legislative process is an inherently conservative design, applying boundary conditions — a bottle-neck of sorts — on the rate of change of the system. 

All of this is great: America’s stability has enabled the economy to reach astronomical heights, and we have these checks and balances to thank for our resilient civil liberties… It is also the reason why there is a tremendous amount of disdain for government. The American people are frustrated with government inaction (with Congress’s historic approval hovering jarringly in the mid-20’s) even on policies with majority support: gun control, campaign finance reform, or a maximum age on elected officials.

Of the three cases of civil change listed above — desegregation, suffrage, and gay marriage — two were driven by the Supreme Court (Brown v. Board of Education and United States v. Windsor) via legal precedent, rather than structural progress; and that only women’s suffrage resulted in a landmark change to the legislative landscape — the 19th Amendment. 

Ask anyone who has worked in a corporate setting before, and she will tell you large diverse committees (on the order of 535 representatives in the case of the US Congress) naturally favor inaction and a propensity to stagnate, and just to continue with what has worked so far. Indeed, as mentioned previously, this was very much deliberate in the design established by the Founding Fathers, and yet we still celebrate the idea that reform can come from within, but how can we be expected to advance when we’re caught up in the uncertainties of change. 

In the tech and start-up industry, there’s a mantra of “move fast and break things,” encapsulating the idea that the only way to make progress is to embrace change and deal with the consequences on the fly. Progress is an iterative process, and in order to advance you have to be willing to push through mistakes. The way forward is not always obvious, and so experimentation means risking temporary hardship away from a local max in pursuit of greater equity. 

This premise works well in a private commercial setting, with willing and able team members, and the results are undeniable — it is this form of rapid iteration that has enabled companies like Google and Amazon. After all, should any member object to the direction or approach the company may take, she is free to leave and start her own, employing her own ideas to boot (although some legal restrictions may apply).

In the case of a country, however, the second part of the clause, “and break things,” should give anyone pause. Indeed, tolerance for risk is significantly reduced when a whole population’s wellbeing lies in the balance and may be exposed to any experimental downside. More saliently to elected politicians, the four year term cycle imposes a strict time-horizon for any plans to come into fruition, limiting the public’s appetite for “temporary hardship.”

So then what can be done when the risks necessary to drive progress cannot be taken on a national level? Remarkably, Hirschman’s dichotomy lays the answer out for us plainly: out-source the risk. 

This line of reasoning follows directly from the principle that when change is too difficult to drive from within, the most frustrated and motivated of the populace will emigrate to realize their ideals elsewhere. These exiting factions are precisely the risk-taking elements of the population with vision to drive change, and in this way by analyzing these “child” developments, nations are able to export the creative engine of experimentation: adopt the ideas that work, and steer clear of those which flop. 

Two assumptions are made in arriving at this resolution: 1) the nation must be adequately permeable, as to allow whole sects of the population to leave freely, and 2) there must be a viable domain to immigrate onto, ripe for change itself. 

At the risk of oversimplification, this is visible in the case of the founding of the United States by British settlers, and again in the case of Frontier expansion within America. In both cases, dissatisfied groups claimed unknown land in pursuit of staking out a better future for themselves and their ideals - the New World in the case of British political or religious radicals, and the Wild West, spanning from the Mississippi river to what would eventually be claimed as California, in the case of American homesteaders; and in both cases, this freedom to expand would result in novel customs and cultures (kindled by those who were successful) that would eventually back-propagate to their former nations.

To me, it’s important to acknowledge the role this dynamic has had on the development of current-day civilization because it illustrates the incompleteness of modern democratic institutions when taken alone. Much of today’s discourse in the West frames governments as independent units that can be crafted to be willing and able to any and all parties within its borders, but it is my belief that, for the reasons stated above, this is an apparent fallacy: it is not the formation of government that enables long-term stability, it is the interplay of that nation in a spatio-temporal network of societies. 

If there is one thing I hope for readers to take away from this somewhat circular argument, it is this false premise that underlines the way we talk about government reform. This raises the question, however, of what happens when we find ourselves out of land on which to experiment.

Any disgruntled radical on the market today for acreage to plant a flag would find slim pickings: with the exception of Bir Tawil and Antarctica, all landmass on Earth has an existing governmental claim - the latter of which is off limits in accordance with the Antarctic Treaty of 1959.

This brings me to the future of state-building and how to regear the role of a nation’s government moving forward, and another person partial to Hirschman’s work: Balaji Srinivasan, the entrepreneur, tech investor and Bitcoin enthusiast. In his own book, The Network State, Srinivasan alludes to Exit, Voice, and Loyalty as a backbone for his own proposal: the power of digital states to enable the formation of nations based on ideology rather than simple geographical coincidence. In developing this profound idea, however, I think that Srinivasan misses the most immediate consequence of his thought experiment, in a solution to the problem articulated above.

I would be remiss if I were to suggest network states as a complete alternative to the current paradigm, and that the idea of a physical state should be abolished, as the realization of a network state poses a number of looming questions on other parts of our civilization, but on this one not insignificant matter, it does offer an apparent way forward. In the coming weeks I want to investigate the implications of Srinivasan’s work to develop an idea of how his proposals fit into the broader picture, and update accordingly in a second post.