A Problem of Allocation

Solving the problem of allocation is the mission of many institutions and key to a nation's success.

Originally published on July 12, 2021.

It's Allocation All the Way Down

Most functional institutions exist to solve the problem of allocation. Resources are always finite and often scarce, and so the most basic question society has to figure out is: who gets what, and how much of it are they entitled to? At scale, this becomes an incredibly complex task that no individual or group can achieve by itself, so we engage in a division of labour to gather more information, employ greater effort, and share the burden of allocation.

Class systems and race hierarchies across history are examples of divisions of labour that attempt to solve their respective problems of allocation, and are a product of the harsh considerations that are made for who and what is deemed worthy of scarce resources like food, shelter, and wealth in general. Human beings are engaged in constant competition over resources, and it’s usually a winner-takes-all game.

Unfortunately, this means that instead of fairer distribution of resources, the elites of a society more often build extractionary regimes that create deep material divides and impoverish a people. So, simply engaging in allocation isn’t good enough. To solve the problem of allocation is also a qualitative measure of what constitutes ‘fair allocation’: how much buy-in does a regime get from the people by distributing resources? What are the levels of inequality in that society? To what degree can someone in the bottom rungs of a society become part of its elite?

Elites that take this seriously and build systems of allocation that focus on maximising the potential of their people - be that their talents, wealth creation, and so on - are considered to be successful allocators. One of the reasons for the rise of Rome was its ability to allocate resources through competent institutions of state, not just to achieve military logistical efficiency or to feed the burgeoning population of Rome, but to achieve buy-in from its soldiers and citizens through land distribution and citizenship (a recurring theme in Why Nations Fail). If you have a stake in a system, you’re far more willing to fight for it. Likewise, societies considered successful today (Germany, Singapore, and America - though as of late, less so) spend large sums of money in building (relatively) mechanisms (usually educational institutions) for cultivating individuals from all walks of life to achieve high levels of education, enter prestigious professional fields, and either become wealthy private individuals or serve in public office. The aspiration of most modern societies is rarely a truly egalitarian society, but an equitable one in which opportunity is spread out as far as possible.

The global economic system we live in is really a set of American(-inspired) institutions to solve the problem of allocation through (relatively) open trade and capitalism. This is often just called the global system, capitalism, or something more concrete: American Empire. The empire is an ecosystem of interdependent social, economic, and political institutions and networks, be it the Ivy League networks that monopolise elite positions, the American government and military, the IMF and World Bank, and so on. They come together to form a particular system of allocation operating on a global scale. The narrative is that the open market is responsible for achieving significant improvements in the standards of human existence (e.g. lifting billions out of poverty, and creating electricity, cars, and air travel) and so is the optimal system of allocation available to humanity.

For politically communist polities like the USSR (then) and China (now), optimal allocation is at the explicit guidance of the State (usually staffed by an unimpeachable political vanguard party). Since the reforms of Deng Xiaoping, China has seen hundreds of millions lifted out of poverty, advanced metropolises light up its coasts, and has become the world’s eminent economic power. China’s participation in the open market amounts to an organised actor muscling its way into a buffet, choosing what it wants, and walking off without paying, all the while insulting the buffet as an awful dining experience (as an anti-communist, I am partial to the buffet). The narrative is that the politically communist, state directed system of China is the optimal system of allocation available to humanity.

While given an ideological veneer, conflict between empires usually boils down to who gets to determine the allocation of resources, which is really to say: we will get the choicest cuts of the lamb, and you’ll get the scraps. Most human conflict is driven by the deep-seated fear that you will be the one being allocated to, not the allocator. Ideologies are a narrative tool by an actor to shift the power of allocation to them. Without this narrative power, it would be hard to convince people to struggle, fight, and if necessary die for God and/or nation, etc, if they came to understand that most often they were just fighting for someone else's right to monopolise resource allocation.

From aligning talent with professional career paths to ensuring food supplies for cities to determining what industries are given the supplies they need to function, we are engaging in an industrial-scale conveyor belt of allocating resources every single day. Yet we rarely think about this, assuming that this gargantuan process is largely the result of an emergent order and not the systems and processes first envisioned and put into action by people like you and me, widely adopted and replicated, and then given a life of its own.

These systems are otherwise known as institutions.

Great Founders Build Exceptional Institutions of Allocation

Samo Burja's Great Founder Theory ('GFT') is a primer into his theory of history that is 'neither individualist nor structuralist but a synthesis of both.' In this theory, history is driven by active agents, known as ‘founders’, who build institutions that achieve certain objectives and outlast the founder himself. These founders, small in number, are responsible for the equally small number of institutions that form the core of any society.

From preserving and transmitting knowledge for a particular domain (be it religion or manufacturing, etc) to ensuring stable succession in polities, institutions are the means by which transaction costs are reduced for coordinating individuals towards a particular objective. Put simply: we produce superior results through collaborating than we would individually.

The building of a functional institution usually depends on the extraordinary ability of an individual (or a group centred around that individual). That individual creates the vision, is usually charismatic enough to acquire a following of other intelligent individuals, and builds the institution that strategically guides the group and society towards their vision. Because of their effectiveness, functional institutions are then mimicked by a host of institutions that possess the form of these core institutions, but cannot replicate the function and so as a collective (of non-functional institutions)  rarely achieve the same level of influence and change as the core functional institution itself.

Changes in a society are usually the consequence of changes in the core institutions themselves, such as new ideas and cultural trend. However, a consequence of this is that when institutions experience decline, due to their interdependent nature, they rely on each other to hide their individual incompetence until the whole edifice comes crashing down. This is why social collapse can often feel like a process of 'gradually, then suddenly all at once.'

All of this is to say that institutions operate on a power law basis, and the most powerful institutions are few in number and run by a few exceptional individuals but are responsible for the most influence on any society. This limited number of institutions work together in an ‘ecosystem’ that forms the core of any civilisation. The economic principle of the division of labour applies just as much between institutions as it does between individuals engaging in economic bargain. Every institution plays its role in its zone of competence. No one institution can do it all.

GFT is important in the context of the problem of allocation because the most successful societies are marked by superior systems of allocation. Yet to achieve this, they need exceptional institutions (built by exceptional individuals) that can competently allocate resources.

Ibn Khaldun & the Value of Labour

The division of labour is popularly known through Adam Smith's Wealth of Nations, considered the canonical text for free trade economics, of which the division of labour forms a lynchpin and perhaps even it's raison d'etre. However, long before Smith and the Wealth of Nations, Ibn Khaldun was writing about it as a critical feature of civilisation,

It is beyond the power of one man alone to do all that, or even part of it, by himself. Thus, he cannot do without a combination of many powers from among his fellow beings if he is to obtain food for himself and for them. Through cooperation, the needs of a number of persons, many times greater than their own (number), can be satisfied.

Ibn Khaldun further noted (and something which Smith described in very similar terms, down to the comparison between people and gold),

The common people who hear them think that the prosperity of these peoples is the result of the greater amount of property owned by them, or of the existence of gold and silver mines in their country in larger number than elsewhere… A large civilization yields large profits because of the large amount of available labour, which is the cause of profit.

Ibn Khaldun was describing a world in which labour-intensive industries dominated, with artisanal craftsmanship available only to a small minority of people. As for ‘intelligent labour', short of already being wealthy and affording a suite of tutors from a young age, it was extremely unlikely that a young person could be plucked out of their village and farm labour, educated for several years, and then put into a position requiring deep intellectual work. To do this at an industrial scale would have been impossible since industries requiring this knowledge (e.g. today's manufacturing sectors) did not yet exist. So, raw numbers of people able to perform manual labour was the main signifier of total wealth.

The situation today is completely different. The nature of labour has both qualitatively and quantitatively changed; numbers are no guarantee of wealth or success as machine arms replace forearms, and intelligent labour to design, build, and operate that machinery takes precedence.

Another thinker who shared similar thoughts on the importance of building the productive powers of a nation through the cultivation and allocation of talent was Friedrich List, also writing in the context of political economy. His ideas and how they intersect with Ibn Khaldun are very relevant.

Allocation, Allocation, Allocation

If the most precious form of wealth is labour, and the division of labour is key to civilisations operating at scale, then one of the fundamental problems in any complex society is how we cultivate and allocate talent. The most amount of wealth comes from not just having more people in work, but having the right people working in the right places. The most successful societies are the ones who've come closest to achieving optimal allocation. Talent can find its way relatively easily to a) where society needs them; and, b) where they would most flourish. The role of education isn't to educate in the philosophical sense, but to allocate in the economic sense.

However, too much of a division of labour can turn into rigid compartmentalisation, with misaligned talent, constrained scopes of action, and fragmenting knowledge (as part of competition within organisations). We aren't seeking to maximise the division of labour but to have optimal allocation, which is always a difficult balancing act of competing forces.

Our educational institutions focused specifically on these problems of allocation pertaining to education and labour are therefore some of our most important. This is reflected in that most developed states spend anywhere between 4-8% of their GDP on education, one of the largest forms of expenditure after healthcare and social security (pensions, welfare/benefits, etc). We put our youth through a gauntlet of various institutions from the age of 3 upwards of 21 (kindergarten to university), every step of the way sorting them like a factory conveyor belt into the different paths of life, determined by various forces: their own wants, social pressure (e.g. family), or implicitly through government programmes that incentivise the production of graduates in a particular field (right now, mostly STEM). The idea is that along the way, people largely land where they're supposed to be in the 'world of work', maximising their productivity and making the nation wealthier.

The aim is to achieve virtuous cycles of competence by compounding the benefits of identifying promising individuals, having them work together in the right fields, and build great institutions which in turn cultivate the next cohort and generation to do the same. So, building functional institutions in the GFT sense itself often relies on a good system of allocation beforehand. It's less a one-way flow and more of a cyclical relationship.

Dysfunctional societies are both the result of and further encourage poor allocation. Talent struggles to find their purpose, and even if they do, struggle to find the institutions and jobs in which they would flourish. Instead they end up in paths in which they are not happy, and in which society does not necessarily need them. For instance, the archetypal would-be artist or inventor who instead becomes a doctor owing to societal pressure and economic poverty. Talent misallocation results in further misallocation in a vicious cycle as people operate outside their fields of competence and desire and do a bad job of things, or the failure of allocation leads to the dismissal of the importance of labour and towards more extractionary forms of government, coupled with greater welfare systems that numb the productive powers.

For real world examples, differences in minority outcomes in western countries are less to do with exogenous factors, i.e. external favouritism or policies (it's hard to positively interfere in favour of boosting a certain group's achievement, and usually much easier to negatively interfere through removing obstacles and letting them take the opportunity themselves), and more to do with endogenous factors, i.e. the social technologies and institutions a group build to funnel their youth to the best positions. Minorities like the Chinese, Indians, and Jews, are exceptionally good at allocation. Their success is often treated as being the result of an internal conspiracy or external favouritism, but rather, they're simply extremely good at knowing where they need to go to achieve (material) success, and how to allocate the fruits of that success to their community’s needs in virtuous cycles of competence. They freely share this information with each other, but not with outsiders (to maintain an in-group advantage necessary to their survival). Some see this as a negative aspect of this dynamic, but competition for resources is ruthless and the protection of information is one of the key tactics to protecting your in-group's position against capture.

Less successful minority groups tend to struggle not due to conspiratorial government intervention to suppress them, or even in spite of government support to boost their levels of educational attainment and net wealth, but because they have not built in-group institutions that optimally allocate resources such as labour and wealth. This is a difficult process, and successful institutions are the exception, not the rule. This multigenerational process requires the design and adoption of social technologies that act as lubricants for these institutions, as well as a strong sense of community (asabiya, if you will) that acts as a dam for the gains made from this process for reinvestment into the community.

This is usually the design of a small group of people within that in-group, or even a single individual, who becomes the progenitor for an entire system that his group continues to adhere to long after his passing, even to the point where they no longer understand its origins. But if their scope of action is too constrained and they can't convince or overpower their in-group to implement these reforms, then they'll just go somewhere else, or worse, languish where they are.

Conclusion

Concluding, the problem of allocation is something that the smallest and largest institutions in society engage in on a daily basis. Managing the allocation of resources, and more importantly, labour, is fundamental to our existence as a complex civilisation. Successful states and communities are marked by their ability to allocate talent to the places where they'll be most effective, to achieve buy-in through fairer distribution of resources, and to create virtuous cycles of competence. Unsuccessful states and communities are marked by poor systems of allocation where the few extract and consume the most resources, and where talent is left to languish in poverty and misaligned career paths while the undeserving sit in positions of power. Most conflict boils down to which system of allocation run by a particular group of people predominates over the other, and owing to the harsh existence of reality, this can often be fatal for the loser.

The good news is that we have the agency to build good systems of allocation. If we want to reform our organisations, communities, and societies, or even build new ones, we need to solve this problem because it acts as a constraint on our own scope of action (we need the right people and resources around us to execute on grand ideas), but also because if we can solve the problem of allocation in our sphere of action, we can create a virtuous cycle that continues the system long after we've retired or died. Competence breeds competence, and the last thing we want is a short period of success followed by stagnation. It's good if you can build an institution. It's better if you can keep it.

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