Centralization and Decentralization

Centralization of decision-making has obvious advantages but also some serious catastrophic failure modes. How can the degree and extent of centralization be managed in a socio-economic system?

In designing a new socio-economic system, hopefully free from some of the built-in catastrophes of previous inventions, one important question relates to the centralization of decision-making. The opposite is decentralization, but there is actually a continuum of alternatives lying between these two extremes. The continuum extends in two dimensions, both in the degree of decentralization, meaning the level in a governmental hierarchy where decisions are made, and the scope of decentralization, meaning the number of different decisions that are being considered for centralization. The oversimplified answers are to centralize everything to the highest level or to decentralize everything to the lowest level, and like all simple solutions to complex problems, they are designed to ensure the built-in catastrophes will happen. To minimize them, something different is needed.

What goes wrong with centralization of decision-making? The same problems exist with any monopolization of control. The person or persons at the top, making the decisions, don’t make them well, and then everyone affected suffers from the choices. The first reason that centralized decisions might be poorly made is uncertainty. If the information necessary to make the best choice is not available to the decision-makers or their subordinates or advisors, then they are forced to make an arbitrary choice. If the decision-making were decentralized, there would be many different choices made, and after a period of time, the results of these different choices would be available for comparison. The best could be evaluated, and more information used for future iterations of the decision-making. This would imply that decentralization might be a good temporary expedient to use until the data was in and the best choice was clearly visible, but the counter to this is that conditions change, and therefore what constitutes best might change, meaning evaluation via decentralization is needed again. The conditions might not be the thing that is changing, but the alternatives might be, as new ones are devised and made available for widespread use. Thus, in a stable, unchanging situation, centralization might be a good decision from the single point of view of efficiency, but not otherwise.

The second problem with centralization of decision-making is the drive to uniformity when uniformity is not the best solution. It is easy for a centralized decision-maker to do some sort of evaluation and make a choice that will be implemented everywhere. However, this is based on the assumption that there is a universal best choice. What is best for one area or for one group or for one time might not be best for another area, group or time. This is referred to as the local conditions situation. For centralization to work well, there would have to be knowledge of how local conditions affect the outcomes of a certain decision, and that local knowledge would have to be available to the centralized decision-makers. Efficiency takes a hit here, as the evaluation of a set of alternatives would have to be done considering the variations in local conditions. Uniformity has a great appeal, as do all simple solutions, but it is often a totally false assumption that uniformity would produce the best results in all conditions. Even what is defined as best may differ when different locations, groups or times are considered, and if the definition of best varies, then uniform solutions cannot hope to achieve this local best except in fortuitous circumstances.

The third problem is actually a set of problems collected under one label, and the label is corruption. It is so much easier to have corruption in a centralized system than in a decentralized one, as a monopoly of control can be exploited by the individual making the decisions at the center of power. Corruption does not simply mean that the decision-maker takes some benefit in order to make a decision favoring a particular party. This is only one of the many facets of corruption, and perhaps the most well-known and appreciated one. However there are more. A centralized decision-maker can have a different agenda that the one appropriate to his position. The centralized decision-maker might have his/her own interests at stake, and therefore seek to have some benefits received for making a particular decision. The ways in which this could happen and even be disguised are manifold. But the agenda the centralized decision-maker has might not be oriented around maximizing his own benefits. After all, benefits are asymptotic in that more and more of something often produces less and less enjoyment and appreciation. They are psychological individuals who feel good about counts of things, but for many individuals, they obtain their enjoyment other ways and tilt their decisions according to these ways.

One is simply the human lust for power. The ability to control aspects of the lives of others provides enjoyment to others, and has for the entire history of humanity. This might explain the desire for the monopolization of decision-making, but it does not portray the whole spectrum of agendas that a centralized decision-maker might have. One is a hidden antipathy to some location or group. Decisions can be made which disfavor the location or locations or group or groups that the antipathy is directed toward. The more subjective the decision, the more that antipathy can be concealed.

The inverse is just as possible. Nepotism toward one’s family or friends might be fairly obvious, but nepotism toward some location or group, the opposite of antipathy, can also be easily concealed.

Furthermore, it does not have to be simply antipathy or nepotism which drives the decisions of a centralized decision-maker, it can be a preference for control of some particular aspect of the lives, of everyone affected or of some subset of the population. Decisions have side-effects, sometimes dramatic ones which in the long-term diminishments overwhelm any short-term benefits. A corrupt decision-maker can promote his preference of opinions by shifting the choices he/she makes. Over the long-term, these effects would be felt.

Self-benefit, antipathy, nepotism, and side-effects are not simply present in top-level decisions in a centralized decision-making arrangement; they can appear at any level. If decisions of a certain category are decentralized to some lower level, the exact same phenomena can appear at that level. It would not have the wide-ranging effect that a single monopolistic decision would, but it would still have a local effect. Preventing this might be seen as one justification for centralizing decisions. Local corruption is overridden by higher-level control. Unfortunately, the higher-level control is just as prone, or possibly more prone, to corruption. There are other means that a newly designed socio-economic system can mitigate corruption.

One is transparency. Transparency is easier to obtain at small local levels, where interpersonal contract is common. Knowing someone as an individual is more likely to reveal their tendency toward corruption than only hearing about a decision via some disseminated ukase. Establishing transparency at high levels of concentrations of decision-making power might be very difficult, and can be countered by having specialists at providing deceptive façades for the justification of all decisions. Investigation of such decision-making by other specialists, perhaps self-appointed ones, can be made difficult by the denial of access or simply by having a unified front of interface people, all of whom are familiar with the façades.

Thus, there are tremendous disadvantages to centralized decision-making, but there is one advantage that is similarly huge: efficiency. If the same decision has to be made thousands of times, as opposed to once, it stands to reason that the same level of attention and scrutiny to the details of the decision cannot be afforded. A centralized decision-maker can have a large staff devoted to a single decision, and even with this, the costs of making the decision once are much smaller than making it at the lowest level of governance. To make a decision properly, in a complex situation, there might be much academic or otherwise collected information and theories to be located and digested. It might be necessary to hire a specialist with a background in some certain area to review this data, and it might even be necessary to have a team appointed to do this. The costs of a decision are not the same at the lowest level and the highest level, as there is considerably more data to analyse when considering a decision that would be implemented on a very wide scale, but the costs do not scale up proportionally with size, perhaps increasing instead only logarithmically. It might well be that at the lowest levels, the cost of an objective decision are simply too high, and some subjective choices would need to be made. Perhaps the solution would be to copy some other location’s decisions, or to keep the prior decision barring some obvious failures, or to simply make a haphazard choice based on incomplete information and inadequate models and interpretations.

There are some clear antidotes to the poison of corruption and the poison of inefficiency. One is to make decisions at the lowest level where the resources would be available to make a thorough decision, perhaps not at the highest or lowest levels, but somewhere in the middle. The other would be to invent methods of ensuring transparency, and of training sufficient specialists that there is no shortage of people able to investigate decisions. Perhaps jocularly, another solution would be to raise everyone up in the society to expect corruption of various types to pop up everywhere, as well as inappropriate subjectivity. People tend to be raised in a trusting environment, without adequate warning and training for the situation that exists in the real world, and countering that some formal way might provide another mitigation for the problems of centralization and decentralization.