This chapter provides a systematic discussion of the concept of institutional genes and other related methodological concerns. For readers with an academic interest in economics, political science, and sociology, I anticipate that this new general theoretical (or analytical) framework will facilitate a deeper understanding of why the evolutionary trajectory of institutions is confined by existing institutions. It aims to open the black box of path-dependency theory by explaining how certain key mechanisms within institutions arise and re-emerge throughout their evolution and how they impact other facets of institutions. However, I have strived to ensure that most chapters remain relatively self-contained. Hence, for readers who are less interested in methodology, skipping this chapter should not impair the basic comprehension of other chapters, albeit at the cost of understanding the underlying logic.
The methodology employed in this book for analyzing institutional evolution draws inspiration from institutional design theory or mechanism design theory. This branch of economics, although often presented in a mathematical framework, emerged from the intellectual discourse in the Lange–Hayek debate of the 1930s and 1940s regarding socialist and capitalist systems. In a broader sense, the methodology utilized in this book represents a linguistic, generalized, and nonmathematical application of the principles underlying institutional design theory. By embracing the essence of this theory as an analytical framework for organizing and examining empirical evidence, I aim to delve into the origins and development of totalitarianism, with a particular focus on China. Concurrently, I also explore the institutional conditions necessary for the establishment of constitutionalism.
In this book, the concept of institution is defined with a focus on operationalization and concrete analysis rather than attempting to provide an abstract and all-encompassing definition. Specifically, institutions are defined as the fundamental and stable mechanisms of incentives and constraints that shape the behavior of key actors in major social interactions. These mechanisms or institutions encompass various aspects such as political and economic governance structures at the national and community levels, judicial systems, and mechanisms related to the protection or violation of human rights, property rights, and political decision-making power. This definition includes both tangible and intangible elements, formal and informal mechanisms of incentives and constraints, and the influence of social consensus, religions, beliefs, and ideologies that deeply impact these incentives and constraints. By adopting this definition, the book establishes an analytical framework for understanding institutional evolution, with the institutions of the past serving as the foundation for explaining subsequent institutions.
The analysis in this book emphasizes the key actors involved in major social interactions. This approach is taken to highlight the significant events and players that drive the process of institutional evolution. By focusing on the most important actors, the analysis aims to avoid the distraction of factors that play a minor role in shaping institutions. The underlying assumption is that players in various social games, including planners, organizers, and informed individuals, as well as those who may be misled or deceived, are driven by their own interests. It is the stable and fundamental incentives and constraints that influence these players, which, in turn, determine the primary conditions for major historical developments and the direction of significant institutional evolution.
Douglass North’s definition of institutions as “the rules of the game” and “humanly devised constraints that structure political, economic and social interaction” is mostly acknowledged in political economy (North, Reference North1991). Despite being humanly devised, institutions typically emerge through gradual evolution. North’s definition, though comprehensive, is somewhat abstract. The operational definitions in this book are a subset of North’s definition and are more conducive to concrete analysis.
This book is particularly concerned with social consensus, which is an integral part of every institution in the world, whether economic or political, peaceful or violent, democratic or authoritarian. For example, in terms of a general perception of legitimacy and justice, institutions embody a state of equilibrium or a self-sustaining balance between the contrasting ideologies of prominent social members. It is noteworthy that today’s social consensus is linked to its past counterpart and often forms the basis of future social agreements. To some extent, the social consensus of today is intricately linked to that of the past and often underpins the social consensus of the future.
Institutions have been a central theme in the study of political economy since Adam Smith. David Hume, a philosopher who had a profound influence on Smith, highlighted that social norms underpin contracts, one of the most rudimentary institutions. Hume proposed that when social norms favor contract fulfillment, individuals trust others to render a service, thereby fostering an environment conducive to honoring contracts and mutual service. He drew a parallel between the interpersonal dynamics within contractual traditions and the interrelation of blocks in a stone arch, with each element supporting the other. Contemporary economics characterizes this type of contractual tradition as a self-fulfilling equilibrium (Grief, Reference Grief2006; North, Reference North1990). The contractual institution, together with the constitutional institution that protects it, forms stable and fundamental mechanisms of incentives and constraints that affect all players in the market. The social consensus on legitimacy and rationality is the core mechanism for forming, maintaining, and operating these contractual and constitutional systems.
It is worth noting that spot markets and long-term contract markets have distinct characteristics and play different roles in economic exchange. Spot markets, which facilitate immediate transactions, have existed since ancient times and can be seen as a rudimentary form of institution. On the other hand, contractual institutions, exemplified by markets for long-term contracts, are associated with economic and social progress.
History has shown that complex contractual traditions can thrive only in societies that embrace constitutionalism. Constitutionalism requires a social consensus regarding the legitimacy and fairness of constitutional provisions. In such circumstances, the executive branch of government is constrained from interfering with the judiciary or violating private property rights, and the military remains politically neutral, subordinate to civilian politicians. This consensus has effectively prevented military coups or military involvement in politics in countries such as the United Kingdom, which has lacked a written constitution since the Glorious Revolution (1688).
However, in the absence of a constitutional consensus, establishing constitutionalism can be challenging, even after the adoption of a constitution. This leaves constitutional governments vulnerable to overthrow by military forces.
Autocracies, like constitutionalist governments, also rely on social consensus for their enduring existence. Mao Zedong’s well-known declaration that “political power emerges from the barrel of a gun” advocates a model of political legitimacy underpinned by violence. However, a long-lasting autocratic regime necessitates a social consensus that endows its rule with legitimacy, extending beyond mere violence.
The precariousness of a polity exclusively reliant on violence is exemplified by the downfall of the exceptionally oppressive Qin Empire (221–206 bce). This empire, notorious for state-sanctioned repression and torture, could not survive beyond its ruling dynasty’s second generation. After the Qin Empire’s demise, subsequent Chinese imperial authorities cultivated a social consensus predicated on hierarchical Confucian norms, which advocated the principle that “the ruler rules, the minister ministers, the father fathers, and the son sons.” This consensus, which pervaded the empire for over two millennia, ascribed everyone a place within the societal hierarchy, from family to national level, necessitating that those at lower levels yield to the directives of those above them. Any actions contradicting this consensus faced societal opposition. Attempts to fundamentally challenge this consensus (and its corresponding institutions) began in late nineteenth-century China but have yielded limited success to date. The enduring influence of the Confucian social consensus persisted for over two millennia, shaping the understanding of societal roles and limiting attempts to fundamentally transform the existing order.
2.1 The Primary Components of Institutions
The institutions examined in this book primarily revolve around government, political power, and property rights. To provide a comprehensive and insightful analysis of these institutions, it is essential to outline the fundamental components that shape their nature and the intricate relationships among them. These components include human rights, property rights, and political decision-making power. Institutions that lack substantial connections to these components are not within the focus of this book’s scope. By focusing on these core elements, the book aims to provide a thorough examination of the institutions that play a vital role in shaping societies and their evolution.
The first primary institutional component we examine is human rights, encompassing the natural person and the intrinsic, fundamental rights associated with the natural person, including the right to life, liberty, and property. Unless otherwise specified, all references to human rights in this book are limited to these basic rights associated with the natural person. In any society, these fundamental human rights determine the degree of control an individual possesses over their own behavior. The extent to which a society’s institutions protect human rights determines the range of choices available to each individual regarding their behavior,1 the entities responsible for resource allocation within society, and the allocation of fundamental rights and interests for all people in that society. In autocratic regimes, the vast majority of individuals, including a significant portion of the elite, are not entirely granted the rights and the power to determine their basic affairs.
John Locke is renowned for his significant contributions to the discourse on human rights within institutional frameworks. His conception of human rights served as the ideological foundation for transformative events such as the Glorious Revolution, the drafting of the United States Constitution, and the development of modern democratic constitutionalism worldwide, including the creation of The Universal Declaration of Human Rights of the United Nations. The fundamental consensus that all individuals have inalienable basic rights is the central pillar of constitutionalism; and constitutionalism, in turn, is the fundamental institution for protecting human rights.2 By contrast, in regimes violating human rights to the extreme, such as slavery in ancient times and totalitarian regimes in modern times, the concept of the natural person is not recognized in principle (China only recognized the natural person and their rights in the law of 2017 but implementation of the law remains a different matter), let alone attempts to itemize the basic rights of the natural person.
The foremost fundamental human right is the right to life, encompassing specific rights such as the right to a fair trial, freedom from torture, and freedom from any form of slavery. The second fundamental right is the right to liberty, the principal aspects of which include factors such as freedom of speech, press, belief, association, and movement.
Under totalitarian rule, virtually no individual possesses basic human rights, including the political elite, except the supreme leader. Anyone, even those occupying the highest societal echelons, can be subjected to punishment or execution for speech, press, beliefs, and unauthorized associations. There is no right to private property, freedom of movement, choice of occupation, or any right to negotiate employment contracts. Even fundamental personal rights, such as reproduction and marital choice, are subject to forcible interference. Notorious instances of political elites deprived of rights include the persecution to death of China’s former president Liu Shaoqi in 1969 and the execution of the former CPSU leader Nikolai Bukharin in 1938, both of whom were denied the right to defend themselves in court.
I place property rights as the second fundamental institutional component, alongside human rights. Property rights are often discussed in both human rights discourse and legal rights discourse within the fields of jurisprudence and anthropology. In the human rights discourse, Aristotle (Reference Aristotle1988), Hayek (Reference Hayek2007), and Friedman (Reference Friedman1962) consider property rights to be inseparable from human freedom, while Locke (Reference Locke1988), under the influence of Spinoza, considers property rights to be an essential component of human rights.3 Pertaining to legal rights discourse, Hume ([Reference Hume1739] 1978) and Bentham ([Reference Bentham1795] 1914) posit that property rights rely on and coexist with the provisions of the law or political power.4 In both discourses, property rights hold paramount significance within institutions. Property rights are not only fundamental for efficiency and economic growth (as considered in economics) but are also pivotal in defining political power and social rights (as studied in political science, law, sociology, and anthropology). When the ultimate control of property rests with the government, the system manifests state ownership; conversely, when control resides in private hands, it embodies a private ownership system.
In any society, the attribution of ultimate control of most property determines the relationship between government and citizens. Property ownership determines the allocation of political and economic power in society and, therefore, the nature of the system. Extending the arguments of Aristotle and Locke, Hayek (Reference Hayek2007) asserts that in societies which deny individual property rights, those devoid of property rights entitlements, regardless of their nominal status, are in all fundamental respects subject only to domination and effectively become slaves.5 The essence lies in the ultimate right of control, not nominal ownership. In societies lacking the rule of law, even where private enterprises are ostensibly permitted, a totalitarian government retains ultimate control over businesses through its direct command over the owners, as exemplified by Nazi Germany.
The third fundamental institutional component is the power structure of political decision-making. In a democratic society where private property rights are protected, the decision-making process for public and community affairs is distinct from the private property-related concerns of individuals, families, private companies, and nongovernmental organizations (NGOs). In such a society, political decision-making is based on collective control, determining how decisions regarding public matters are made and who is authorized to make such decisions.
However, in societies where private property rights are not recognized or where a small group of individuals control the majority of property rights, the distinction between private and collective and between private and public becomes blurred. Individuals who lack ownership rights lose not only their property rights but also their political decision-making power. In such societies, where citizens are deprived of the right to participate in political decisions, power is concentrated solely in the hands of the ruler. This power extends into the private sphere, encompassing decisions on all significant societal matters. In the most extreme form of autocracy, such as a totalitarian regime, political power extends to complete control over every aspect of life, including property rights. The right to participate in political decisions or the power of political decision-making has therefore been a fundamental aspect of institutions in all societies throughout history.
Political power and property rights are intrinsically intertwined and highly complementary, mirrored in the legal rights discourse on property rights. Highly centralized property rights have always corresponded to highly centralized political power, while more decentralized property rights have been associated with more decentralized political power. Substantial evidence reveals that the origins of early autocratic and democratic institutions can be traced back to prehistoric practices in the form of highly concentrated and dispersed property rights, respectively. Historical facts and institutional mechanisms suggest that universal private ownership underpins democracy, while total dispossession of private ownership forms the basis of autocracy. Several scholars (Marx, Hayek, and North, for instance) argue that property rights shape political powers. However, formal recognition of property rights relies on legal provisions and political power, suggesting from another perspective that political power dictates property rights. This viewpoint is reflected in the works of Popper, Acemoglu, and Robinson (2012), among others. The extensive history of institutional evolution shows that political power and property rights have developed in parallel, in a manner reminiscent of a chicken-and-egg conundrum rather than one preceding the other. The philosopher and jurist Jeremy Bentham (1748–1832) encapsulated this notion succinctly, “Property and law are born and must die together. Before the laws, there was no property; take away the laws, all property ceases.”6 With this in mind, the central aim of this book is to dissect those institutional conditions or mechanisms that facilitate or curb the concentration of political power and property rights.
A democratic system is a structure that safeguards individuals’ rights, a system where citizens collaboratively tackle matters of collective concern under the condition that individual rights are not violated in the process. The distinction between individual rights and collective decision-making power can only be drawn when individuals possess property rights and the autonomy to manage their affairs. Therefore, universal private ownership serves as the cornerstone of democracy. In a direct democracy, all citizens participate in making collective decisions on matters of public concern, such as electing leaders, determining taxation, and deciding on issues of war and peace, through direct voting. The direct democracies of ancient Greece and contemporary Switzerland, as well as referendums in modern democracies, are examples. However, most modern democracies are indirect, where citizens elect representatives (such as parliamentarians) who subsequently make collective decisions on societal matters through voting.
In contrast to democracy, in a totalitarian system political power dominates and governs every aspect of society. The foundation of this all-encompassing political power lies in the absolute control of the totalitarian party over all societal property, including direct control over state-owned assets and indirect control of private assets through controlling their nominal owners. In such a system, obedience to the party is the only option for everyone. Additionally, every facet of personal and familial life, including occupation, income, housing, and sometimes even marriage and reproduction, is subject to the authority of the party-state. This level of control by the totalitarian regime surpasses that of Imperial China. In the traditional Chinese Empire, although there was no landed aristocracy or other elite with decision-making powers independent of the royal court, social norms still maintained a boundary between the family domain and the exercise of political power.
2.1.1 Incentive-Compatible Institutional Changes
The incentive-compatibility principle is a fundamental concept in mechanism design theory and plays a crucial role in the analysis of institutions throughout this book. It states that in any given institution with specific constraints on individuals, the behavior of those individuals would align with the institution’s rules only if the incentives provided by the institution are compatible with their self-interest. An institution that satisfies this principle is considered incentive-compatible.
Incentive-compatible institutions that align with the self-interest of the influential majority tend to endure, as exemplified by the establishment of constitutionalism in Britain following the Glorious Revolution. On the other hand, regimes that rely heavily on coercion and violence, like the short-lived Qin and Sui dynasties of the Chinese Empire, tend to be incentive-incompatible with the influential majority and unsustainable.
In conventional mechanism design theory, a fundamental premise is that all participation in games or relationships among the players is voluntary, reflecting the principal conditions and liberties of a free society that respects human rights. However, the institutions examined in this book are largely autocratic and totalitarian.
Under authoritarian regimes, not only do the governed individuals face violence or threats thereof but such coercive measures are often also extended to social elites. Hence, the self-interested behavior discussed in this book does not pertain solely to voluntary actions but also includes choices made under duress when individuals are deprived of their fundamental rights and live in the shadow of violence.
The concept of incentive-compatibility encompasses the decisions that individuals make based on self-interest. These choices include not just their preferred options but also those made under coercion, such as selecting the least harmful outcome when faced with torture, forced confession, or other forms of repression.
In an autocratic system, the incentive-compatibility conditions for the ruled include the coercive conditions of the use of violence by the rulers. Therefore, we need to modify the incentive-compatibility conditions in the mechanism design theory accordingly. I refer to the incentive-compatibility conditions under threats of violence as the “tyrannical incentive-compatibility” condition.
Furthermore, in any society, each person’s choices and behavior are influenced by the behavior of others, the possible behavior of others, and the social consensus (which is the basis for inferring with the behavior of others). For example, being able to rule over others may bring great benefits to the ruler, while being isolated from others may subject the isolated person to severe active or passive punishment. In brief, within the analytical framework of this book, everyone in society, from the monarch to the enslaved, from the citizen to the parliamentarian, pursues strategies that serve their best interests in the circumstances they encounter.
Analyzing autocratic regimes and the constraints they face has posed a challenge for political economists and political scientists. Oversimplifying the autocratic institution into a model where a dictator solely decides everything is of little use. In reality, even the most extreme dictator depends on others for execution and the enforcers always have their vested interests. Even under the harshest regime, repressed people still have options that align with their interests, including active or passive resistance, reluctant cooperation, or opportunism. Regardless of their ruthlessness, dictators face multiple constraints linked to the incentive-compatibility conditions of their agents and the populace they govern. So they can never freely acquire everything they desire.
A dictatorship is inextricably linked to violence. The advantage of using violence is that it allows the ruler to narrow, to their benefit, the set of strategies available to those being ruled. But violence has costs, both direct and indirect, and the latter could incite a revolt, potentially leading to even higher costs. A canny dictator, therefore, cultivates conditions of tyrannical incentive-compatibility, applying violence at a level that maximizes his gains (power or material gains) while minimizing costs and avoiding provoking rebellion.
While analyzing institutional changes, we regard a particular change as incentive-compatible if it aligns with the interests of the participants and stakeholders. The institutional changes discussed in this book encompass any modification that alters an existing system, such as revolution, reform, or restoration. The key players in any institutional change are the political coalitions or alliances comprised of individuals from various societal sections. Under an autocratic regime, these alliances are often informal. The prevailing institutions themselves impose constraints on all involved while also setting the conditions for incentive-compatibility. As an institution changes, the benefits, losses, and constraints it initially imposed on those concerned change accordingly. The extent to which these changes are incentive-compatible for the main stakeholders determines whether they support or resist the reforms. Incentive-compatible institutional changes attract broad support, enabling the advocates to achieve their objectives relatively smoothly, as in the case of American independence and the Meiji Restoration in Japan, which led to the development of different constitutional systems, respectively. Conversely, incentive-incompatible changes often encounter widespread passive or active resistance. Therefore, even if such institutional changes succeed temporarily on the surface, they are unlikely to achieve the ultimate goals expected by the majority of the participants, as seen in the case of the Russian Revolution of 1905 and the reforms of the late Qing dynasty in China, which failed to establish a sustainable constitutional rule.
In a system wherein property rights and political decision-making powers are dispersed among the citizens, the voters collectively dictate political power through voting. In systems where these rights and powers are intensely concentrated, a select few cliques or a small class of individuals possessing property rights monopolize political decision-making. Alternatively, the cliques or classes monopolizing political decisions control property rights and govern society. Either way, the property rights and political decision-making powers left to those being governed are exceptionally weak. In a totalitarian regime, all property rights and political powers are controlled by the totalitarian political party. It is in the primary interest of the ruler and the groups the ruler relies upon for power to keep control highly centralized. Relinquishing autocratic power or limiting autocratic power would violate the incentive-compatibility conditions of all groups supporting the autocrat. Therefore, there has never been an instance in history where autocrats voluntarily and proactively ceded power in favor of constitutional governance. Instead, the autocrat always strives to maximize his interests, employing the optimal level of violence necessary to retain control over the ruled while satisfying tyrannical incentive-compatibility conditions. Throughout history, all institutional transformations that appeared to be the result of authoritarian rulers abandoning dictatorial rule in favor of constitutional democracy actually occurred under enormous and prolonged external pressure, examples of which include the Glorious Revolution and the democratic transitions in Taiwan and South Korea.
Associated with institutional changes, the conditions for incentive-compatibility tend to be highly dynamic as the perceptions and behaviors of participants and stakeholders often fluctuate under the influence of changes affecting other participants and stakeholders. Moreover, many participants and stakeholders might struggle to discern their long-term interests and may instead opt for strategies that provide immediate gains but undermine their long-term interests. Therefore, during institutional changes, incentive-compatible conditions can be classified into those offering short-term and long-term benefits, which can frequently conflict with each other, whether deliberately designed or unintentionally occurring.
Indeed, history is filled with instances where short-term incentive-compatible conditions have spurred frenzied riots, revolutions, and other drastic institutional changes that are incompatible with the long-term interests of many participants. Leaders of uprisings or revolutions are often skilled at exploiting or cultivating conditions that align with people’s short-term interests to garner widespread support. This was the case with the October Revolution in Russia (including the subsequent civil war) and both the Land Reform movement and Cultural Revolution in China. These events were shaped by leaders who managed to align the short-term interests of the masses with their own, often with profound and long-lasting implications for the societies involved.
However, regardless of how tumultuous the institutional change is, the nature and sustainability of its consequences hinge on the alignment between the resultant system and the long-term interests of the participants – that is, their incentive-compatibility conditions. Individuals who recognize that the institutional change has damaged their interests are liable to harbor resentment and spark revolt and they may seek opportunities to restore an old regime.
Anticipating this, autocratic revolutionary leaders often suppress dissenters once they have solidified their power, thereby creating new tyrannical incentive-compatibility conditions and compelling people to comply. If the tyrannical repression is unsuccessful, the institutional change, being incentive-incompatible in the long term, not only fails but when it does, the regime that replaces it is often closely related to the old one.
The Hundred Days’ Reform, Gengzi Reform (庚子变法), and the Xinhai Revolution are concrete examples that will be discussed in detail in Chapter 9. These episodes vividly illustrate the consequences when short-term and long-term incentive-compatibility conditions do not align and how this dissonance can lead to cycles of revolution and counterrevolution.
2.1.2 Analysis of Incentive-Compatible Institutional Evolution
Observation of the long historical evolution of institutions shows that of the myriad factors that influence them, the most profound and enduring come from pre-existing institutions. In any era, the institutions of the present day are a legacy of the previous institutions, which themselves are the product of institutions in a more distant past. That is, at each historical stage, the historical factors that have the most important ongoing influence on that stage are condensed in the current system.
Institutional evolution is extraordinarily complex. To make the analysis more manageable, we concentrate on first-order important causes leading to significant outcomes – namely, the factors that have had the greatest historical impact on current societies and are manifested in existing institutions. Secondary outcomes and causes, including behaviors and factors that have left no imprint on the institutional evolution, are deliberately abstracted away. This streamlined approach allows for a clearer understanding of the major forces that have shaped institutional development over time.
As previously noted, the concept of incentive-compatible institutional change introduced in this book is inspired by mechanism design theory. Although this book does not delve into mathematical analysis, the description in this subsection corresponds to a theoretical mechanism design model for analyzing institutional changes. Institutional changes that arise in each period are the outcomes of a game played between rulers and the ruled (in autocracies) or supporters and opponents (in democracies). The players in the model are the supporters and opponents in the game of institutional change; they all benefited from or are constrained by the existing institutions. “Supporter” and “opponent” used here are neutral and can refer to either pro-government or anti-government stances. When faced with external changes or shocks (e.g., natural, technological, and other exogenous factors), the ruler or supporter (activists in democracies, revolutionaries in autocracies) maximizes their own interests through institutional change. However, they must consider the reaction of the ruled (or opponent) to such institutional changes. In fact, the response of the ruled (or opponent) constitutes the incentive-compatibility condition for institutional change. Hence, the game of institutional change manifests as the extent to which the ruler (or supporter) can alter institutions, constrained by the incentive-compatibility conditions of the ruled (or opponent). The direction and nature of institutional changes during a specific period are the outcome of this game and the institutions of each subsequent period are the result of the actions of the players in relation to the institutions of their time. “Period” here is an abstract concept, referring to any historical period in which institutional change occurred, such as a specific constitutional reform, revolution, or dynastic transition. We can assume this game to progress through an infinite number of periods, as mathematically, it is often easier to analyze a game with an infinite number of periods than a game with a finite number of periods.7
When all players achieve the best possible outcomes they can obtain in the game, maintaining the result of the institutional change will be in each player’s self-interest. This type of result is referred to as an “equilibrium state” (or Nash equilibrium). It is crucial to emphasize that the “best outcome” or “equilibrium” here pertains to the result attained under all constraints imposed by the institution on the parties, including the conditions of tyrannical incentive-compatibility. For instance, in an autocracy, accepting forced compliance might be the optimal outcome when the punishment for disobedience is severe, such as torture.
The term “institutional change” incorporates a broad range of activities including insurrections, rebellions, revolutions, progressions, restorations, and the rise and fall of pressure groups. The costs and benefits of the institutional change brought to participants in any given period and the extent of those costs and benefits have a cascading effect on subsequent periods. In each round of the game, decision-making relies on the main results of the previous rounds, which are already implanted in the current institution.
2.2 Institutional Genes in Institutional Evolution
Although analytically inspiring, the complexity level of the mechanism-design type of theoretical model of institutional evolution is beyond the current level of economic theory. It involves numerous heterogeneous participants and a vast number of variables, with complex and highly dynamic incentive-compatibility conditions for the participants. Finding closed-form or numerical solutions for such models, including analyzing their mathematical properties, is a formidable challenge. Empirically testing this theoretical model would require a breakthrough in processing historical archives, for example using artificial intelligence approaches.
Furthermore, this type of model is based on the assumption of perfect rationality in individuals. However, institutional evolution often involves players with bounded rationality and changes frequently occur in environments with significant time constraints, intense pressure, and a lack of essential information, all of which often make improvisational decisions inevitable (à la Mises).
While I believe that the analytical framework of mechanism design theory maintains validity and offers substantial value for analyzing institutional evolution, even considering bounded rationality, how to model decisions concretely under bounded rationality remains an unsolved fundamental issue in social science.
To navigate these technological hurdles and make preliminary progress in the analysis of incentive-compatible institutional evolution, this book introduces a significantly simplified analytical framework or concept: institutional genes. To a certain degree, the concept of institutional genes can be considered a reduced form derived from analyzing incentive-compatible institutional change as discussed above.
In addition to its logical linkage with mechanism design theory, the concept of institutional genes also emerges from empirical observations. Upon examining long-term institutional evolutions throughout history, many historians have noticed that certain fundamental institutional components continually recur, sometimes with variations, influencing the course of institutional change. Moreover, these institutional elements, which determine the incentive-compatibility of institutional changes for the key participants, often tend to be reproduced by the participants themselves.
We refer to these foundational, self-replicating elements in long-term institutional evolution as institutional genes. This concept provides a useful lens to understand the iterative nature of institutional change and the forces that shape its trajectory over time.
This term might seem like a metaphor borrowed from biology, employing evolution and the replication and mutation of genes within organisms to illustrate the process of institutional change. While this way of understanding institutional genes is beneficial, the concept of institutional genes introduced in this book extends far beyond being merely a metaphor; it serves as a substantial analytical concept. As noted earlier, this concept emerges from systematic observation of institutional evolution and from analyzing incentive-compatible institutional changes. Hence, it is a practical and operational analytical concept. Theoretically, the concept is a reduced form derived from mechanism design theory as applied to incentive-compatible institutional change. So, the concept encapsulates key elements of highly complex institutional change in a greatly simplified fashion. This approach enables us to focus on fundamental mechanisms that repeat throughout history, playing a primary role in institutional change and being compatible with participant incentives. Empirically, institutional genes are recurring fundamental phenomena that can be observed, with many already recognized by historians. Evidently, repetition and replication, as used here, do not imply a duplication of every detail. Actually, the mutation and evolution of institutional genes form a principal aspect of our analysis.
2.2.1 Basic Characteristics of Institutional Genes
The so-called institutional genes are some of the basic institutional components that have constantly been self-replicated in determining the basic characteristics of institutions over a long period of institutional evolution. The self-replication of institutional genes is caused by their influence on the incentive-compatible conditions of the main participants in institutional evolution. In the process of institutional evolution, participants choose to reproduce the institutional components that are favorable to them out of their self-interest, resulting in “self-replication.” These self-replicating institutional elements, in turn, tend to affect the incentive-compatible conditions for future institutional changes in the next round of institutional evolution. They are then replicated again under similar mechanisms and so on, repeating the cycle indefinitely.
Institutional genes have three elementary characteristics that are intrinsically complementary and indispensable to one another. They are: (1) repetitiveness, (2) incentive-compatibleness, and (3) stemness. These attributes are crucial for comprehending incentive-compatible institutional evolution and empirically identifying institutional genes.
Repetitiveness refers to the recurrence of basic institutional structures over time. It is important to note that repetitiveness here implies the reiteration of essential features rather than mechanistic replication of every detail. For instance, China’s top-down bureaucratic governance, that is to say, the so-called junxian (郡县) system or prefecture-county system, despite undergoing significant modifications since its establishment under the Qin dynasty, has maintained its basic structure until today, even outliving the empire itself. Consequently, we identify the junxian system as one of the institutional genes of Chinese imperial rule (Chapter 4). Conversely, the Chancellorship system, practiced under several of China’s dynasties, was not perpetuated because it was not incentive-compatible for the emperor and is thus not considered an institutional gene of China (Chapter 4).
The second fundamental characteristic of institutional genes is their incentive-compatibility; that is, the recurring structural components we identify as institutional genes must be intimately related to the incentives for participants. To a large extent, this is the mechanism for the functioning of institutional genes. The reason these recurring components are replicated is that participants choose them in pursuit of their own interests. Incentives could include opportunities for material gain, social status, and spiritual or ideological benefits.
For instance, the imperial examination system and Confucianism have not only been replicated from generation to generation for millennia but are also directly linked to the interests of the rulers and intellectuals in the Chinese Empire. Therefore, it is a fundamental institutional gene of China’s institutional change which will be explored in detail in Chapter 5.
The third characteristic of institutional genes is stemness. Institutional genes are foundational for a spectrum of institutions, encompassing the basic institutional structure as well as the social consensus, such as the beliefs and ideologies that influence the consensus on the legitimacy of the authority.
For example, Russian Orthodoxy was one of the fundamental institutional genes that gave birth to Bolshevism (to be discussed in Chapters 7 and 8). Buddhism, on the other hand, despite its long history in China, does not have a foundational impact on the structure and functioning of a society’s institutions in China analyzed in this book and is therefore not identified as a Chinese institutional gene.
Specific institutional genes embodying the above three attributes could encompass fundamental institutional structures directly affecting participants’ status and material interests, such as basic bureaucratic structures and specific property rights arrangements, political parties, guilds, associations, clubs, NGOs, and so on. These could also include institutions of organized faith such as religion and the Church and a range of popularly held ideas, cultures, beliefs, and ideologies such as freedom, equality, justice, legitimacy, revolution, fraternity, nationalism, race, class, enemy, emperor, royalty, aristocracy, individualism, and collectivism, among others, due to their impact on social consensus.
The rationale for including social consensus as part of institutional genes is that consensus significantly influences political power structures and property rights. On the one hand, shifts in social consensus can instigate changes in power structures and property rights. On the other hand, these structures themselves impact social consensus, which could have long-term effects.
In autocracies, rulers consciously manipulate ideological control to master social consensus, aiming to maintain monopolistic structures of political power and property rights. Simultaneously, social consensus evolves with institutions, reproducing itself as it gets passed on from generation to generation.
Social consensus in a society complements the power–property structure of that society and they mutually reinforce each other. This is exemplified by the role of human rights in society. On the one hand, a consensus on human rights can only arise in institutions where a significant number of individuals already possess property rights and some political powers, that is to say, the structure of political powers and property rights are dispersed. On the other hand, the protection of human rights can only be established where there is already a consensus on the value and importance of human rights.
When a substantial portion of society has private property rights and some political powers, a consensus emerges among these people to protect their own and others’ fundamental rights. Those who benefit from such an institution actively advocate for the protection of other people’s human rights, thus nurturing the institutional gene of human rights in society.
As human rights become established as a social consensus, as an institutional gene, individuals with certain rights push for institutions to adopt stronger human rights protections. They aim to extend these protections to a wider range of functions (from property rights to freedoms in more areas) and to include more individuals (from rights that benefit many to universal rights). They do this in pursuit of their own self-interest, as well as in the interest of broader societal equity and justice.
The same logic applies to institutions that violate or do not recognize human rights. In absolutist regimes, such as the Chinese imperial system, all individuals, including the social elite, are subject to the rule of the emperor and his court. Everyone relies on the emperor’s beneficence for their rights, survival, and well-being. The legitimacy of such a system is rooted in a social consensus that the sovereign embodies the state and that families and individuals owe their existence to the state. This implies that everyone depends on the benevolence of the sovereign and their interests align with those of the state.
This consensus breeds loyalty to the sovereign, which is transmitted as an institutional gene through the generations, preserving the supremacy of the ruler or the state. This institutional gene not only perpetuates autocratic systems but also tends to resist the emergence of new institutional components that challenge absolutism.
An awareness of human rights cannot flourish in a system where people lack fundamental rights and are powerless to instigate change. Even if the concept of human rights is introduced externally, the rulers and the absolutist institution will vehemently oppose it, employing measures such as ideological taboos because it undermines the legitimacy of autocratic rule. Moreover, under autocratic governance, the principle of human rights is often dismissed and efforts to safeguard these rights are rebuffed by the populace because the concept conflicts with the prevailing consensus on the supremacy of the ruler or state.
When the populace at large has never had any fundamental rights considered inviolable, individuals who have been intimidated and indoctrinated into accepting the supremacy of the sovereign or state are conditioned to conflate their individual rights with state interests. Consequently, they are not only likely to reject the concept of human rights but also to view the protection of human rights as a threat to the state, the sovereign, and their own interests. People in such circumstances demonstrate hostility towards actions and reforms supporting human rights. This consensus is passed down to future generations, giving rise to an institutional gene that opposes human rights. A case in point is that public opinion polls conducted in China over decades reveal that individuals whose basic rights are most violated are often the ones who most strongly resist the notion of protecting human rights.
Major institutional changes throughout human history are typically triggered by exogenous factors or forces, which are associated with significant changes or shocks in the external environment. If we concentrate solely on these exogenous shocks, history may seem like a series of incidental events. For instance, without the First World War and the clandestine return of Lenin to Russia facilitated by the German government, the Russian October Revolution, which established the Bolshevik regime, might never have occurred (see Chapter 8). Similarly, without the Xinhai Revolution initiated by Sun Yat-sen using overseas forces, the Gengzi New Deal might have led to a constitutional monarchy or even transitioned from nominal constitutionalism to more substantive constitutionalism (see Chapter 9). Furthermore, absent the Japanese invasion and the Xi’an Incident, the destiny of the Chinese Communist Party and its Red Army might have been drastically different.
However, changes spurred by external forces can set off developments in countless directions, whereas the course along which the institution ultimately evolves, grows, and sustains itself, among the myriad of possible directions, is significantly shaped by enduring domestic institutional genes. These institutional genes outline the state of the internal forces and the range of choices available to them.
The impact of multiple external forces, which could be in opposite directions, depends on the choices made by major local players based on their own interests. External forces that can be easily integrated with local institutional genes will more effectively change the local system due to these choices. In contrast, external forces that are hostile to local institutional genes tend to face resistance because they conflict with the interests of most local participants. Likewise, a specific array of external shocks can have remarkably diverse effects on different institutions, contingent upon how their institutional genes interact with these external forces. Consequently, pinpointing the pertinent institutional genes and discerning their characteristics is crucial to comprehending how an institution might react to external disruptions and to understanding the dynamics and boundaries of such changes. Hence, an understanding of institutional genes helps us explain the trajectories of past institutional change and anticipate possible trajectories of institutional change in the future.
The formation and evolution of institutional genes are not deterministic, nor are they within the domain of deliberate design or control, whether in a democracy or an autocracy. Neither voters nor dictators can exercise absolute control over the evolution of institutional genes. For instance, Christianity, which has long been a foundational institutional gene in the West, originated as a minority Jewish faith and initially faced challenges to its survival. At that point, it evolved into an institutional gene of certain societal strata. After the Roman Empire established Christianity as the state religion in the early fourth century, Christianity and the Church evolved into fundamental institutions of Western society and gradually became the institutional genes that shaped the West.
In fact, not only was the contribution of Constantine the Great, the Roman emperor at the time, limited in the establishment of these institutional genes but Constantine himself was deeply influenced by the evolving Christianity. By Constantine’s time, Christianity had already amassed a substantial following and had begun to evolve from a humble grassroots faith into a popular religion with significant political, economic, and even military influence. This rise was intrinsically linked to the spontaneous spread of Christianity around the Mediterranean in the three centuries before Constantine’s reign. It was this “external” factor that transformed Christianity from being persecuted by the Roman Empire to becoming the state religion of the Roman Empire under Constantine the Great.
Similarly, the imperial examination system and Confucianism as institutional genes were not created by any individual. Chapter 5 will analyze how Confucianism endured a similar transformation from being persecuted to becoming a state religion and gradually developed into an institutional gene of the Chinese imperial system.
Institutional genes are not exclusively determined by endogenous factors. While institutional genes are relatively stable, external pressures can significantly influence their evolution and prompt substantial changes over a relatively brief period. Crucially, pre-existing institutional genes deeply influence the incentive-compatibility conditions of the primary participants, thereby determining the effect of external forces as well as the pace and direction of subsequent evolution. An institution, as defined broadly in this book, encompasses all elements that profoundly affect incentives and constraints, including related factors such as religion, belief, and ideology, among others. Historically, these elements have demonstrated substantial fluidity and a transnational nature. The most prevalent systems of faith and ideology in China – excluding Confucianism and Taoism – were imported from abroad. It is even more so the case in Russia. However, not all beliefs originating from abroad will proliferate to the same extent in any given country. Endogenous institutional genes play a critical role in determining which external influences are to be assimilated and which are not. When absorbed, these external influences tend to be localized in various forms, the nature of which is intimately linked with pre-existing institutional genes.
In the subsequent chapters, we use the cases of China and Russia to analyze how external influences interact with existing institutional genes and how these can be absorbed or modified and become quasi-indigenous when they benefit the major players. Conversely, we will examine how external influences are rejected when they prove detrimental to the major players and how they are accommodated in a distorted form to meet the needs of these players when complete rejection is not feasible. This includes the fate of democratic constitutionalism and Marxism in Russia and China, respectively, along with the origins of Leninism and Maoism, which ultimately evolved into significant institutional genes in the USSR and China, respectively.
The institutional genes discussed in this book focus on fundamental structures of political power and property rights, along with the associated social consensus, which dictate the trajectory of institutional evolution in general. The types of institutions to be focused on are constitutionalism and its opposite, totalitarianism. By nature, constitutionalism employs institutional mechanisms to restrain the most potent societal elements and preclude any individual or organization from monopolizing power. Therefore, the most powerful often oppose moves towards constitutionalism. However, in societies where power and rights are already relatively dispersed, the transition to constitutionalism aligns with the incentives of individuals possessing political power and property rights. The dispersed structure of power and property rights in such a society fuels the demand for incentive-compatible institutional shifts towards constitutionalism.
This book focuses on the analysis of autocratic institutions: the first, most persistent, and pervasive institutions in human history. Despite their extensive history and diversity, autocracies share a common feature: they are headed by rulers who utilize violence – often in the name of the state or God – to maintain a monopoly over political power and property rights. In an autocracy, the prevailing social consensus often includes ideologies that advocate for the supremacy of the monarch or state. The institutional genes of autocracies invariably consist of highly monopolized political power and property rights, reinforced by social consensus.
The reason that individuals living under autocratic rule generally accept such beliefs, thereby fostering a social consensus that seems counter to their interests, lies in their exposure to generational violence and indoctrination. In societies with deep-seated autocratic institutional genes, even if the number of people pursuing constitutionalism increases due to external influences, the political and economic power of those who seek constitutional reform remains weak due to the highly concentrated power and property rights.
Promoting constitutional reform in an autocratic society invariably poses significant challenges as the forces propelling reform are often weak and there is a widespread social consensus in favor of autocratic governance. These combined factors often make peaceful constitutional reform incompatible with the incentives of autocratic rulers and their followers. Consequently, a violent uprising or revolution may seem more attractive to a large segment of the rebelling population for whom non-peaceful actions may be perceived as incentive-compatible in the short term.
However, violent revolution often results in the creation of a new system that is genetically similar to the old one. First, leaders of rebellions or revolutions find it convenient to construct autocratic institutions under the guise of revolutionary change, leveraging the existing consensus that favors autocratic rule. Second, the overwhelming monopoly on political power and property rights in society has fostered a belief that violence is the only way to bring about change, or at least the most direct way. Third, even if the revolutionary elites genuinely aspire to establish a constitutional democracy, the collective relinquishment of power after a violent takeover becomes incentive-incompatible for them because the very act of violent revolution relies on highly centralized power structures and the stakes of keeping the power are too high.
2.2.2 Institutional Genes, Path Dependence, and Institutional Design Theory
The concept and analytical approach of institutional genes and incentive-compatible institutional change developed in this book are partly influenced by Douglass North’s path-dependency theory. North’s theory has had a profound impact on the analysis of institutional evolution, with more recent proponents including Acemoglu and Robinson (Reference Acemoglu and Robinson2012). The theory argues that past institutional choices have a deep impact on today’s possible institutional choices, as the path of institutional evolution is closely tied to history. This is because institutions evolve in the direction they are already heading, driven by self-reinforcing mechanisms and increasing returns. Mechanisms that once shaped an institution also set its future course.8 As a result, historical institutional evolution often manifests as a path of virtuous cycles and traps of vicious cycles. North’s account helps explain why institutions continue to improve in some countries while spiraling down in others. However, it is less powerful at explaining delicate cases like the transformations in South Korea and Taiwan, where they seemed to have transitioned into new territories beyond their historical paths.
The most noticeable example of the virtuous circle described by North is that of the Glorious Revolution and Industrial Revolution in Britain. North sees the Glorious Revolution as the event that pushed Britain onto the path of a virtuous cycle, which was subsequently followed by the United States. While discussions of vicious circles most often refer to African and Latin American countries, there is little in-depth analysis of the systems in China, Russia, and Japan from the perspective of path dependency and virtually no discussion of totalitarian institutions.
Methodologically speaking, when discussing technological- and market-related issues like the internet, industry standards, and industrial clusters, the increasing returns hypothesis can be a useful explanation for path-dependence phenomena. However, when applied to institutional matters related to incentives, this hypothesis often becomes less relevant. In contrast, the concept of “institutional genes” in this book places greater emphasis on specific incentive mechanisms associated with institutions, which, in turn, influence institutional changes.
Using the concepts of institutional genes and incentive-compatible institutional change as analytical tools, we scrutinize the interests of participants and other stakeholders involved in institutional change. This method will explain how historical and current institutions shape the trajectory of future institutional changes, effectively opening the “black box” associated with path-dependency theory. The increasing returns of a certain institutional evolution path may occur because a certain institutional change aligns with the interests of more people within such a system. The underlying reason may be connected to existing incentive mechanisms or consensus among people within the institution, with deviations from this consensus being punished. Inherited institutional genes influence today’s conditions for incentive-compatibility, leading to the reproduction of past institutional genes through today’s institutional change. Current institutional genes, in turn, affect future conditions for incentive-compatible institutional change, thus influencing future institutional genes. The increasing returns mechanism in path-dependency theory may be a special case of certain institutional genes’ self-replication but institutional genes do not necessarily involve increasing returns.
The concept of institutional genes and the analytical approach to incentive-compatible institutional change are intrinsically linked to mechanism design theory, which has its roots in the Lange–Hayek debate on socialism versus capitalism. Since the late 1970s, mechanism design theory has evolved into a significant branch of theoretical economics, focusing on analyzing incentives within institutions (Hurwicz, Reference Hurwicz2008; Maskin, Reference Maskin2008; Myerson, Reference Myerson2008). Furthermore, it offers a method for the empirical analysis of institutions and guides the practical design or reform of these structures. A cornerstone of institutional design theory is incentive-compatibility. This principle posits that for any effectively designed rule to be viable in practice, it must align with the incentives of those it affects. Within this theoretical paradigm, the modern theory of property rights has been expanded, elucidating why control over property – or property rights – stands as a pivotal institution in addressing paramount incentive issues (Hart, Reference Hart1995; 2017). Likewise, operating within this same framework and transcending Hayek’s philosophical deductions, there have been pivotal theoretical and empirical advancements concerning dynamic incentive issues in economies marked by state ownership. A prime example of such a finding is the realization that the “soft budget constraint” (SBC) syndrome is an inevitable drawback in “socialist economies” (Kornai, Reference Kornai1980; Dewatripont and Maskin, Reference Dewatripont and Maskin1995; Kornai et al., Reference Kornai, Maskin and Roland2003).
However, since the 1930s, debates on state versus private ownership and planned versus market economies have largely sidestepped the subjects of political power and the prerequisites for institutional transformation. Instead, they have narrowly concentrated on the resulting resource allocations from various property rights arrangements and economic coordination mechanisms. While Hayek later rightly argued that abolishing private property rights leads to serfdom, the conditions that pave the way to either serfdom or constitutionalism have not been adequately emphasized as central to this debate.
Building on a rich array of empirical observations and the latest theoretical advancements, this book aims to broaden this seminal debate that began in the 1930s. Approaching from a positive analysis standpoint, I aspire for the concept of institutional genes to enhance our comprehension of the origins and evolution of totalitarian regimes, the conditions fostering constitutional regimes, and the intricate dynamics of institutional change at large.
For instance, after the fall of communist totalitarianism in Eastern Europe and the Soviet Union, why did the transitions differ so dramatically across nations, with some moving towards constitutional democracy and others, like Russia, veering towards authoritarianism? To address this issue, in addition to the institutional genes left by communist totalitarianism, how did the institutional genes of the Russian Empire, the Ottoman Empire, and the Austro-Hungarian Empire influence the diverse transition pathways of different countries?
In another context, the United States successfully aided Japan in founding and solidifying a constitutional democracy after the Second World War. Yet it faced persistent failures in its attempts to install such a system in Iraq after the Iraq War (2003–2011). Why? Delving into the institutional genes of these countries might unlock answers to these compelling questions. What role did Japan’s historical remnants of the feudal system and the Meiji Restoration play? Similarly, in Iraq’s case, how did institutional genes implanted by the Ottoman Empire and those stemming from the broader Arab world and Islamic faith shape its institutional evolution?
From a normative analytical perspective, this book posits that institutional genes establish the foundational conditions impacting the success or failure of institutional or policy reforms. The inherent constraints imposed by institutional genes cannot be overlooked in the design of institutional reforms and policies. Overlooking them could result in reforms that, regardless of their impeccable logic, may either fail in execution, remain superficial, or even become a source of upheaval.
By shedding light on the significant impacts of institutional genes on existing institutions and institutional changes, I hope this book can contribute to the creation of concrete and practical policy principles for institutional and policy reforms.
