Proposal for Administration Engineering

Akinobu Yasumoto
Executive Director, GISPRI

Within the harsh competition of institutional reform among countries, those who succeed in developing the administration engineering for an institutional design will be the winners in the next decade.

'Market failure' is often pointed out. However, most 'Market failure' is actually the failure of an institution rather than the failure of the market. Let me take solutions to environmental problems, which are often considered as market failures, as an example.

'Leave everything to the market' means 'leave everything to the independent choice of individuals.'  Even though a whole nation believes unanimously that environmental protection is important, it will be difficult to achieve a good result by leaving solutions to environmental problems to the market without preparing an institution to create incentives for environmental protection. In such a situation, as costs deriving from environmental protection become handicaps in competition unless they are guaranteed by institutions, those who try to benefit by avoiding costs would emerge. Because it is natural under such concerns that no one would bear costs to protect the environment. An effort to solve problems by moralistic argument without preparing a rigorous institution might result in a situation where only the honest and obedient become losers. The reason the market is not oriented toward environmental protection despite unanimous support for protection, is in this case, not because there is a problem in market functioning but because no offering incentives to environmental protection is built in the market.

If market performance changes according to institutions, it is reasonable to consider that institutions should be reformed to achieve a good performance. The importance of institutions has been recognized ever since it was argued by Adam Smith. However, to my surprise, many economists -with few exceptions like Hurwicz-have been skeptical toward institutional design. This is despite the fact that many institutions, like laws and the in-house rules of companies -- with the exception of customs and other voluntary institutions -- have been developed intentionally. If we have to prepare rules to be observed by human society through laws and other means in any case, we should prepare them only after thorough examination of chains of incentives from the society and the organization levels to the individual level.

Of course, it is generally difficult to judge the root cause of a certain economic phenomenon in the actual economy and to prescribe effective actions with appropriate incentives. (For example, it is difficult to make a judgement from the actual bubble phenomenon whether the emergence of the bubble economy was due to a lack of information or other elements, whether the emergence of the bubble economy can be avoided through certain types of regulation, etc.) However, with the advance of theories such as game theory and auction theory, experiments that were traditionally considered available only in the sphere of the natural sciences have now become also available in economics. Such methods are becoming applicable to institutional design. We are now being ushered into the age of the birth of a new engineering which can be called  'administration engineering' or 'institutional engineering', named after the recently popular 'financial engineering'.

Paradoxically the more the market takes over social decision making from the government due to deregulation, the more important institutional design of the market will become a governmental task. Regardless of efforts on the company level as well as on the individual level, such effort will not bear fruit as long as the institutional system of a nation causes inefficiency and inequality. State-of-the-art theories and experiments are applied to designs for airplanes or large-scale bridges as a matter of course. State-of-the-art theories and experiments should be freely used for an institutional design as well, to realize the best possible achievement down to the details. We have now been ushered into such age.

With the advance of globalization, the time has come for companies to choose countries. In such a situation, governments and people that cannot choose countries to belong to cannot but develop good institutions. It is expected that international competition in the future will increasingly lead to institutional competition among countries. Hoping for new developments in Japan, I anticipate progress in administration engineering.

*This paper is translated from his Japanese original paper in the "Chikyu-ken(GISPRI) Newsletter" Vol.12,
  No.4 issued in April 2000.

                                                                                                               (May 1st, 2000)