Why organizations fail. The case of FCB

The Spanish economist Luis Garicano, who had a short-lived political experience in the failed political party Ciudadanos, has an excellent academic article in the Journal of Economic Literature with the title “Why Organizations Fail.” The title is an analogy with the famous book “Why Nations Fail,” previously writen by Acemoglu and Robinson.

Certainly, not only nations fail, organizations also fail. It is common among economists to study market failure, but it was less common to study the failures of whole nations or organizations. Governments also fail, as communities do. Needless to say, all these mechanisms of resource allocation may also succeed. Good economists, like Garicano or Acemoglu, are good at identifying reasons for success and failure.

In his article on organizational failure, Garicano mentioned among others two usual reasons for it, namely shortcomings in the allocation of talent and mistakes in allocating resources among the short run and the  long run. Good organizations allocate well their scarce talent, and do a good job at attracting and retaining it at the relevant jobs. They also manage well short run problems, at the same time that they devote resources to innovation and to thinking about their future.

These two basic ideas have come to my mind recently on occasion of the decline of FC Barcelona, my soccer team, arguably the best team in the world between 2005 and 2015, the years of Leo Messi, Andrés Iniesta and others. The rise and fall of the club are very well described in the book by Simon Kuper about it. But this distinguished journalist left the story before it emerged that the club had been paying more than 7 milion euros to the vice-president of the committee in charge of allocating referees to games and to categories, and the subsequent PR campaign of the current President, Joan Laporta, to reject any responsibility and couter-attack with a populist campaign blaming rivals Real Madrid and the Franco regime (yes, that military dictatorship that finished almost 50 years ago).

Barça does a very bad job at allocating talent. The president is elected by the members and operates in a framework of no checks and balances. The current one lacks any management skills and any self-discipline. The club officials around Mr. Laporta are their friends or even relatives, and there is currently no professional structure of experts in organizational turnarounds. However, there is no shortage of experts in communication, starting with Laporta himself, who takes any problem, not as a management challenge, but as a communication challenge, not unlike Boris Johnson or Donald Trump.

The club not only has failed to prepare for the future in its good years, but is now obsessed with the past, blaming the Franco regime, and trying to revive the recent good cycle by trying to sign again an ageing Leo Messi. And it is basically giving up on the future, by paying for current signings with the revenues obtained by selling money-making assets.

This (and Garicano’s reasons for organizational failure) begs the question of what are the factors that facilitate organizational failure. In this case, the populism of a democratic club with no checks and balances plays in my view an important role. Barça is too important to fail, and like many top football clubs it will be bailed out before it disappears (football clubs do not disappear, as explained by Kuper and Szymanski in Soccernomics). A consequence of this is moral hazard in the behavior of club officials, as they don’t face the full consequences of their incompetence (or worse). Other clubs have similar characteristics, but for reasons that deserve further study, the case of my club is an extreme one. However, since the team will not disappear, we can always hope that another lucky shock is around the corner, in the form of another generation of great players.

The exceptional Good Friday Agreement

The 25 year-old Good Friday Agreement in Northern Ireland was exceptional in the double sense that it was a very good agreement, and that it was an exception among other “peace” agreements around the same period of time. The Dayton agreement about the former Yugoslavia or the Oslo agreement about Israel/Palestine were based on the “solution” of creating “nation-states” along ethnic lines. The equivalent in Norhtern Ireland would have been to create a new state for the Catholics (to be merged with the Republic of ireland) and another for the Protestants (to be kept in the United Kingdom). That was not the choice, to try to preserve one single community in a small region where Catholics, Protestants and those that prefer not to be tagged share the land. The Good Friday Agreement has been much more successful in promoting at the same time peace and prosperity than the other two agreements.

In my view, its relative success was based on two key characteristics of the agreement:

-No borders. That is, after the agreement, there would be no checks between the Republic of Ireland and Northern Ireland. Common institutions would be created, along the lines of the functional overlapping jurisdictions conceived by the Swiss economist Bruno Frey. For example, a common wholesale electricity market would allocate this scarce resource South and North of the (former) border. The fact that in 1998 both the Republic of Ireland and the UK were part of the European Union no doubt facilitated things. Imagination beyond the straightjacket of the "nation-state" did the rest.

-Vote over an agreement. The democratic procedure to decide on the Constitutional future of Northern Ireland was the opposite to that established with Brexit. In Northern Ireland, first all the interested parties with democratic support reached a detailed agreement, and this agreement was subject to a plebiscite in the Republic of Ireland and Northern Ireland, where the Yes vote won overwhelmingly. There were no doubts about what had been chosen, and there were no divisions. The referendum was a festival of unity, not of polarization and lies.

My modest perspective is one not of an expert but one of a distant but interested observer. I am interested because Norther Ireland, Yugoslavia and Israel/Palestine are not the only lands with identity conflicts (violent or peaceful). If we realize that the Northern Irish way is the one that should prevail, we will be taking the route of a diverse democracy and not the route of ethnocracy, which is what has been prevailing in the Balcans and in Israel/Palestine. If democracy is not able to cope with diversity and equal rights for all individuals it transforms itself into an ethnocracy, a set of institutions that only looks after some ethnic, religious or linguistic group.The Good Friday Agreement is not perfect. Probably, a perfect agreement was and is impossible. There are two aspects of it that I particularly dislike. One is that shared government is based on tagging parties (and citizens) as Protestant and Catholic, instead of giving incentives for inter-comuniatrian parties or civil society organizations. It would have been better to promote qualified majorities without the need for tagging. In any case, the influence of inter-community organizations such as the Women’s Coalition and the Alliance Party has been a very positive development in the last 25 years.

The other aspect I don’t like is that, to facilitate the signature of Sinn Fein, the political branch of the IRA, the Good Friday Agreement accepts the possibility of a a future referendum over a united Ireland, which would be the opposite of the referendums that made the Good Friday Agreement a reality. Brexit has interfered and that Irish referendum is now more likely than in the past, although the failure of Brexit and the recent pragmatic agreement on Northern Ireland belonging to the Single Market may make this development unnecessary. As The Economist recently said, "the Brexit vote critically destabilized a deal which had deliberately and helpfully blurred the border on the island."

25 years ago, the less populists politicians prevailed, but unfortunately they have been outvoted by the more radical parties in Northern Ireland, in spite of the progress of the Alliance Party. With Trump and Johnson, the Agreement would have been impossible. The Good Friday Agreement is an example of how to defeat the worst of national-populism and identity politics, through abolishing frontiers and voting after and not before, an agreement.

Trump, Johnson, Netanyahu and other elitist populists

The academic literature on populism in political science and economics has converged around an accepted definition of populism (the one first coined by political scientist Cas Mudde) as "a thin-centered ideology that considers society to be ultimately separated into two homogenous and antagonistic groups, ‘the pure people’ versus ‘the corrupt elite,’ and which argues that politics should be an expression of the general will of the people."

Some aspects of this definition seem to me undisputable, as the reference to a “thin-centered” ideology that can be adapted to different projects, or the references to the will of a pure people that leaves no room for pluralism. 

Many of these movements also include an emphasis on a “corrupt elite,” like for example the Spanish party Podemos, with its initial reference to the battle between the “caste” and the people.

However, some of the most iconic examples of populism would have a hard time portraying themselves as part of the people as opposed to a distant corrupt elite, because it is implausible to take the view that they are not part of this corrupt elite. I have in mind Trump, Johnson, Netanyahu, and also some of the leaders of Catalan national-populism that are not in the global news but that I know well.

Trump, Johnson, Netanyahu and some of our local populists that I have in mind come from privileged families, and most of them have received an elitist education. Johsnon went to Oxford (read Simon Kuper’s book “Chums”), Netanyahu went to the MIT, and one of the most disruptive Catalan national populists has a Phd in Economics from the University of Minnesota. All of them are part of the dominant ethnic (or ethno-linguistic, or demographic) group and live in the neighborhoods of the rich and not the working class.

Here are the most important characterstics of their behavior as I see them:

-Victimization to confront judicial problems.

-Devaluation of institutions.

-Placing themselves beyond the rule of law.

-Disruptive promotion of Polarization.

But not being anti-elitist in any sense. Is this important or am I just obsessed with a few examples?

It could still be that an anti-elitist rhetoric is part of most populist movements, but anti-elitist behavior doesn’t seem to be a fundamental trait of some of the most important of them.