Institutional Capital Theory
An Economic Theory of Institutional Assets, State Capacity and Public Value
Forthcoming.
Preface: Two Problems in the Life of Public Capabilities
This book addresses two problems that conventional institutional analysis does not adequately capture.
The first is the silent deterioration of public capabilities. Institutions may continue to exist, be funded, and perform their formal functions while the capabilities that make them effective progressively weaken. A statistical office continues to publish while the reliability of what it publishes declines. A registry remains operational while the share of the population it covers erodes. A payment platform continues to run while the software beneath it goes out of support. Because institutional analysis observes institutions rather than capabilities, these losses usually become visible only once performance has already deteriorated, by which point the remedy is reconstruction rather than maintenance, at several times the cost. Governments do not budget for this decay, and the reason is an accounting one. It must be stated precisely, because the broad formulation would be false. Existing statistical and accounting frameworks already capitalise part of these assets: the System of National Accounts treats software, databases and research and development as fixed capital formation, including in general government, and IPSAS 31 governs public-sector intangible assets. What is missing is therefore not every category, but two precise things: the organisational, legal and human component of the institutional asset, which is nowhere recorded as an asset, and the maintenance obligation attached to it. Maintenance of a physical asset is capital preservation. Maintenance of an administrative capability is overhead. Overhead is what a finance ministry cuts first.
The second concerns financing. Institutional capabilities require long-term investment, and their returns arrive over decades. That combination makes their creation and renewal acutely sensitive to the cost of capital. An asset with a twenty-year productive life can be well worth building at one borrowing cost and not worth building at another, with nothing about the asset, the administration or the reform strategy having changed. Two governments pursuing similar reforms under different financing conditions are not making equivalent investments, and comparisons that treat their plans as equivalent mistake intention for capability.
Neither problem is visible without a particular analytical move, and supplying that move is what the rest of this book does.
The move is simple but consequential: a defined subset of institutional capabilities should be analysed as capital. Where such capabilities show the defining characteristics of productive capital (accumulation through investment, durability, maintenance requirements, depreciation, complementarity, and the recurring generation of services), the analytical apparatus of capital theory applies to them.
That apparatus is the instrument, not the thesis. The claim that public capabilities are built through investment is not itself novel, and Chapter 4 states plainly where it has been made before. What the capital framing supplies is a way of seeing the two problems above. Silent decay becomes depreciation with a rate that could in principle be estimated, and the financing constraint becomes a determinant of the feasible rate of formation rather than an unrelated fact about bond markets.
The purpose is therefore not to replace institutional economics, public administration or state capacity research, but to complement them by introducing Institutional Capital as a distinct analytical category, one that can explain how productive institutional capabilities are created, accumulated, maintained, measured, and converted into institutional services, state capacity and ultimately public value.
Two features of the construction are worth flagging at the outset. The theory states its assumptions as explicit axioms and derives propositions from them, so that a reader who rejects a conclusion can find the assumption responsible. And it generates empirical hypotheses stated so that they can be tested. Chapter 9 sets out how the capital stock might be observed independently of the performance it is supposed to explain, which is the condition under which those hypotheses can fail. Whether they do is not something this book can settle.
The theory is also intentionally modest in scope. Institutional Capital does not explain development on its own. Economic performance reflects the interaction of many forms of capital with political choices, historical trajectories, technological change and external conditions, and Institutional Capital is one essential component within that wider system rather than a master variable. A framework that claimed more would be easier to dismiss and less useful to apply.
The chapters develop the argument cumulatively. Part I establishes the analytical foundations of capital. Part II defines Institutional Capital and shows why a subset of institutional capabilities qualifies, including, in Chapter 4, which do not. Part III explains formation, dynamics and production. Part IV develops the measurement framework, examines evidence drawn from five regions, sets out the financing constraint and derives the policy implications, before the Conclusion integrates these elements into a general theory.
Review record
This book addresses two problems that conventional institutional analysis does not adequately capture.
The first is the silent deterioration of public capabilities. Institutions may continue to exist, be funded, and perform their formal functions while the capabilities that make them effective progressively weaken. A statistical office continues to publish while the reliability of what it publishes declines. A registry remains operational while the share of the population it covers erodes. A payment platform continues to run while the software beneath it goes out of support. Because institutional analysis observes institutions rather than capabilities, these losses usually become visible only once performance has already deteriorated, by which point the remedy is reconstruction rather than maintenance, at several times the cost. Governments do not budget for this decay, and the reason is an accounting one. It must be stated precisely, because the broad formulation would be false. Existing statistical and accounting frameworks already capitalise part of these assets: the System of National Accounts treats software, databases and research and development as fixed capital formation, including in general government, and IPSAS 31 governs public-sector intangible assets. What is missing is therefore not every category, but two precise things: the organisational, legal and human component of the institutional asset, which is nowhere recorded as an asset, and the maintenance obligation attached to it. Maintenance of a physical asset is capital preservation. Maintenance of an administrative capability is overhead. Overhead is what a finance ministry cuts first.
The second concerns financing. Institutional capabilities require long-term investment, and their returns arrive over decades. That combination makes their creation and renewal acutely sensitive to the cost of capital. An asset with a twenty-year productive life can be well worth building at one borrowing cost and not worth building at another, with nothing about the asset, the administration or the reform strategy having changed. Two governments pursuing similar reforms under different financing conditions are not making equivalent investments, and comparisons that treat their plans as equivalent mistake intention for capability.
Neither problem is visible without a particular analytical move, and supplying that move is what the rest of this book does.
The move is simple but consequential: a defined subset of institutional capabilities should be analysed as capital. Where such capabilities show the defining characteristics of productive capital (accumulation through investment, durability, maintenance requirements, depreciation, complementarity, and the recurring generation of services), the analytical apparatus of capital theory applies to them.
That apparatus is the instrument, not the thesis. The claim that public capabilities are built through investment is not itself novel, and Chapter 4 states plainly where it has been made before. What the capital framing supplies is a way of seeing the two problems above. Silent decay becomes depreciation with a rate that could in principle be estimated, and the financing constraint becomes a determinant of the feasible rate of formation rather than an unrelated fact about bond markets.
The purpose is therefore not to replace institutional economics, public administration or state capacity research, but to complement them by introducing Institutional Capital as a distinct analytical category, one that can explain how productive institutional capabilities are created, accumulated, maintained, measured, and converted into institutional services, state capacity and ultimately public value.
Two features of the construction are worth flagging at the outset. The theory states its assumptions as explicit axioms and derives propositions from them, so that a reader who rejects a conclusion can find the assumption responsible. And it generates empirical hypotheses stated so that they can be tested. Chapter 9 sets out how the capital stock might be observed independently of the performance it is supposed to explain, which is the condition under which those hypotheses can fail. Whether they do is not something this book can settle.
The theory is also intentionally modest in scope. Institutional Capital does not explain development on its own. Economic performance reflects the interaction of many forms of capital with political choices, historical trajectories, technological change and external conditions, and Institutional Capital is one essential component within that wider system rather than a master variable. A framework that claimed more would be easier to dismiss and less useful to apply.
The chapters develop the argument cumulatively. Part I establishes the analytical foundations of capital. Part II defines Institutional Capital and shows why a subset of institutional capabilities qualifies, including, in Chapter 4, which do not. Part III explains formation, dynamics and production. Part IV develops the measurement framework, examines evidence drawn from five regions, sets out the financing constraint and derives the policy implications, before the Conclusion integrates these elements into a general theory.
Institutional Capital Theory
An Economic Theory of Institutional Assets, State Capacity and Public Value
Preface: Two Problems in the Life of Public Capabilities
This book addresses two problems that conventional institutional analysis does not adequately capture.
The first is the silent deterioration of public capabilities. Institutions may continue to exist, be funded, and perform their formal functions while the capabilities that make them effective progressively weaken. A statistical office continues to publish while the reliability of what it publishes declines. A registry remains operational while the share of the population it covers erodes. A payment platform continues to run while the software beneath it goes out of support. Because institutional analysis observes institutions rather than capabilities, these losses usually become visible only once performance has already deteriorated, by which point the remedy is reconstruction rather than maintenance, at several times the cost. Governments do not budget for this decay, and the reason is an accounting one. It must be stated precisely, because the broad formulation would be false. Existing statistical and accounting frameworks already capitalise part of these assets: the System of National Accounts treats software, databases and research and development as fixed capital formation, including in general government, and IPSAS 31 governs public-sector intangible assets. What is missing is therefore not every category, but two precise things: the organisational, legal and human component of the institutional asset, which is nowhere recorded as an asset, and the maintenance obligation attached to it. Maintenance of a physical asset is capital preservation. Maintenance of an administrative capability is overhead. Overhead is what a finance ministry cuts first.
The second concerns financing. Institutional capabilities require long-term investment, and their returns arrive over decades. That combination makes their creation and renewal acutely sensitive to the cost of capital. An asset with a twenty-year productive life can be well worth building at one borrowing cost and not worth building at another, with nothing about the asset, the administration or the reform strategy having changed. Two governments pursuing similar reforms under different financing conditions are not making equivalent investments, and comparisons that treat their plans as equivalent mistake intention for capability.
Neither problem is visible without a particular analytical move, and supplying that move is what the rest of this book does.
The move is simple but consequential: a defined subset of institutional capabilities should be analysed as capital. Where such capabilities show the defining characteristics of productive capital (accumulation through investment, durability, maintenance requirements, depreciation, complementarity, and the recurring generation of services), the analytical apparatus of capital theory applies to them.
That apparatus is the instrument, not the thesis. The claim that public capabilities are built through investment is not itself novel, and Chapter 4 states plainly where it has been made before. What the capital framing supplies is a way of seeing the two problems above. Silent decay becomes depreciation with a rate that could in principle be estimated, and the financing constraint becomes a determinant of the feasible rate of formation rather than an unrelated fact about bond markets.
The purpose is therefore not to replace institutional economics, public administration or state capacity research, but to complement them by introducing Institutional Capital as a distinct analytical category, one that can explain how productive institutional capabilities are created, accumulated, maintained, measured, and converted into institutional services, state capacity and ultimately public value.
Two features of the construction are worth flagging at the outset. The theory states its assumptions as explicit axioms and derives propositions from them, so that a reader who rejects a conclusion can find the assumption responsible. And it generates empirical hypotheses stated so that they can be tested. Chapter 9 sets out how the capital stock might be observed independently of the performance it is supposed to explain, which is the condition under which those hypotheses can fail. Whether they do is not something this book can settle.
The theory is also intentionally modest in scope. Institutional Capital does not explain development on its own. Economic performance reflects the interaction of many forms of capital with political choices, historical trajectories, technological change and external conditions, and Institutional Capital is one essential component within that wider system rather than a master variable. A framework that claimed more would be easier to dismiss and less useful to apply.
The chapters develop the argument cumulatively. Part I establishes the analytical foundations of capital. Part II defines Institutional Capital and shows why a subset of institutional capabilities qualifies, including, in Chapter 4, which do not. Part III explains formation, dynamics and production. Part IV develops the measurement framework, examines evidence drawn from five regions, sets out the financing constraint and derives the policy implications, before the Conclusion integrates these elements into a general theory.
Review record
The manuscript was read by an independent panel of economists and social scientists, which returned a written report and a verdict of acceptance subject to moderate revision. The panel raised no objection to the central thesis. Its reservations concerned how the thesis was established, referenced and summarised, and it verified the book’s figures against primary sources.
The report made ten recommendations. All ten were implemented. Among the substantive consequences:
- the general theorem was requalified as a general proposition, and the claim of derivation from axioms was redefined as dependence;
- a redescription rule was written, fixing three cumulative conditions under which an external shock counts as an internal channel of depreciation rather than a confounder. The rule removed one of the book’s own cases;
- the free multipliers were audited and reduced from six to four, each bounded and sign-restricted in advance, with a rule fixing which observations permit which coefficient to be invoked;
- the bibliography was extended from seventeen works to sixty-one numbered references;
- the case selection rule was written out, including the admission that it was reconstructed after the fact.
A second panel, constituted independently of the first and not informed of it, subsequently received the complete manuscript in both the French and English editions.