Introduction

As a society, we use 5 broad classes of institutions: hierarchies, democracies, markets, self-organization, and algorithms. Let us start with a basic question:

What is a system?

A system is

  1. a collection of individuals,
  2. interactions between them, and
  3. relationships influencing those interactions.

Take the computer system I am currently running:

  1. A collection of individuals: processor, memory, battery, keyboard, screen, etc.

Note these individuals are not necessarily atomic. For example, memory could be broken down into volatile (DRAM, or just RAM for most people) and non-volatile (SSD, a.k.a. “disk” or “hard drive”) memory, or keyboard could be broken down into individual buttons (though the usefulness of a keyboard with only one button is suspect).

  1. Interactions between them: battery powering the processor, processor reading file into memory, screen displaying contents of file

Obviously there are many other interactions happening within the computer system; describing all of them would take many textbooks worth of text. The computer in front of you (a phone is also technically a computer) is really incredible if you think about it.

  1. Relationships influencing those interactions: processor draws 15 watts of power, processor cannot read file that does not exist, screen displays “D” for byte in file of value 68

These relationships are often dynamic. For instance, the processor may draw more or less power depending on its load.

What is an institution?

An institution is a system that guides people’s behavior. By extension, a society is a collection of people with the expectation of continued interaction, and the institutions that influence those interactions.1 Let us break down the 5 classes of institutions we mentioned before:

  1. Hierarchies: individuals take on roles of power; an individual can, and is often expected to, make decisions with a role of sufficient power and appropriate scope

Hierarchical structures are often represented as trees, with individuals of roles with less power lower in the tree and individuals of roles with more power higher in the tree.

  1. Democracies: individuals vote on decisions

Usually, each individual has roughly one vote. However, to avoid the “tyranny of the majority,” some individuals may be given significantly more than the equivalent of one vote.

  1. Markets: individuals take on the role of producers and consumers and trade value

Often, though not always, the value being traded is goods, services, and money.

  1. Self-organization: individuals act on their own without a dominant enforced authority

This is in contrast to a democracy, which upon voting on some decision usually relies on a dominant authority (“the government”) to enforce those decisions. Rules and norms in self-organized groups are less formally determined, and often subject to more frequent change.

  1. Algorithms: models trained on previous data make decisions on new data

Almost always we are referring to a model running on a computer when we talk about algorithms. Algorithms are becoming increasingly prominent. Even today, for instance, algorithms are used to make decisions in approving credit and organizing transportation.

Employment is a market

Among the 5 classes previously described, employment most closely matches a market. Recall a market is an institution in which

individuals take on the role of producers and consumers and trade value

Though we typically imagine companies as producers and individuals as consumers in a market, employment is framed as the reverse: individuals produce labor and companies consume that labor in exchange for money (or money-adjacent, such as benefits and equity).

Framing employment as a market allows us to understand many of the empirical observations we make of employment. To take some obvious examples:

  1. Higher-skilled workers are generally paid more because there is less supply and more demand.
  2. The number of Americans in manufacturing has declined over the past century because there is less demand for it, especially as global trade provides manufacturers with cheaper foreign labor.

Conceiving of employment as a market allows us to better understand and predict trends in employment that would not come as naturally otherwise.

Why not other institutions?

Curiously might lead you to question why we do not use other institutions to direct employment. One reason we do not use hierarchies nor algorithms is that we are deeply uncomfortable with the idea of an outside force deciding for us something as important as our work. If I told you that you had to work as an architect when you wanted to be a music producer because the Great Governor or the Great Algorithm said so, you would throw a fit! At least, I would throw a fit.

Why not use democracies then? One major downside of democracies is that they require more time to make decisions. On top of the overhead of holding an election, the democratic process (at least the idealized form) involves communication to mass audiences and deliberation, all of which take time. If we had to take that much time to decide on what job each person would do, we wouldn’t really find much time to actually do our work.

Finally, we don’t use pure2 self-organization because people would over-allocate to desirable jobs and under-allocate to unattractive, often necessary jobs. At the end of the day, someone needs to clean, and we should really pay them more.

Hybrid institutions

In practice, complicated organizations and processes employ multiple types of institutions. Within a company, for example, we might observe the use of democracy in deciding whether to employ someone in a position. Each type of institution has strengths and weaknesses, so becomes more or less appropriate based on context. Markets are good for allocation, and suffer in externalities.

Conclusion

Let's end with some limitations to the framing of employment as a market. The major downside is a downside often found in economics as a whole: the assumption of people as rational. Not everyone makes rational or profit-maximizing3 decisions all the time. Maybe you stay in your stable boring job because you care about other people you provide for. That’s understandable, and not utility-maximizing.4 And while the market can be good at explaining overarching trends, it won’t fully explain why you, personally, prefer one job or one company or one path for yourself.

  1. A common reason for this expectation of continued interaction is physical proximity or shared political authority, though these do not always hold. For example, American society does not encompass a contiguous landmass (or even geographically close landmass, for that matter, considering Hawaii) nor a consistent political authority (considering the local and state governments [which sometimes differ wildly on policy] as well as the sovereign tribal nations). ↩︎

  2. One might argue the market is a narrower form of self-organization involving explicit trade. ↩︎

  3. Utility-maximizing, if you want to get technical ↩︎

  4. Unless you count that sense of duty as utility (normally understood as money or happiness), in which case the bounds of utility become ambiguous. ↩︎