Good Leadership

Institutions are built by people

In my previous essay, I argued that leadership matters because many social failures are, at root, coordination problems. Societies can become stuck in bad equilibria not because people prefer disorder, but because no one believes others will act differently. In such settings, leadership can matter by supplying a new focal point: a credible signal around which expectations can realign, allowing coordination on a better outcome.

I am certainly not alone in this view. Research in institutional economic history suggests that individuals can matter a great deal when societies face coordination games with multiple equilibria. Where more than one outcome is feasible, the actions of particular people can determine which equilibrium is selected.¹

However, there is a related argument which I want to examine. We often hear that what societies need are good institutions, and not good people. Citizens are scolded for searching for a messiah, projecting their hopes onto leaders rather than demanding systemic reform. This position is not objectively wrong. After all, the personalisation of power is a potent ingredient in the cocktail for eventual dysfunction. It is also very easy to mistake charisma for governance. But there is still a more basic question that is not being aired: how do good institutions emerge in the first place?

Institutions do not appear fully formed. At some point, some people have to design them, enforce them, or reform them. It may sound wise to respond to complaints about bad leadership by stating that what is needed are good institutions and not good people. But such wisdom is at best incomplete if it does not tell us how good institutions can emerge from bad leadership. The institutionalist school in economics and development, for all its analytical prowess, offers no fully satisfying answer here. Its accounts of long-run outcomes typically trace institutional change back to a critical juncture, such as a war, a fiscal crisis, or a transition of power. But when examined closely, these junctures always resolve into the actions of particular people making choices that depart from the prevailing equilibrium. Even when institutions are the outcome of structural forces, the mechanism of change still runs through human agency.

The Limit of Incentives

Much of modern political economy explains good governance in terms of incentives. When rules are well-designed, they align private interests with public purpose. Officials enforce laws because dutiful enforcement is rewarded. Leaders govern well because predation is costly. Once such an equilibrium is in place, behaviour becomes largely predictable and outcomes no longer depend too much on individual virtue.

Incentive is a great explanation for institutional persistence, but it is far less satisfying as an explanation for institutional emergence. Incentives are themselves products of institutions. Salaries, sanctions, and property rights all presuppose an existing institutional framework. Yet institutional change is typically necessary when those frameworks are weak or actively hostile to reform. At such moments, the prevailing incentive structure often rewards short-term extraction or simple inaction.

When bad institutions persist, exhortations to fix the incentives may sound good, but they are often shallow. Bad institutions persist because they produce bad incentives. In such an equilibrium, changing the incentives is itself a social coordination problem. None of this denies the importance of incentives once institutions are established. On the contrary, durable institutional success depends on embedding good behaviour in payoffs rather than relying on personal restraint. The point is that incentives explain why systems endure; they do not explain why they begin.

Leadership as Innovation

This brings me to my main argument. Good institutions are a way of solving coordination problems, and they are also a product of leadership. Even further, I believe good leadership is an innovation in the same way we talk about technological or scientific paradigm shifts.

Innovation is first a cognitive shift rather than a response to opportunity. For most of history, people did not systematically try to improve tools or processes, even when improvement was possible. Innovation required a change in mindset. People had to acquire the idea that deliberate improvement was something they could and should attempt.²

Leadership that creates new focal points works in much the same way. In most political settings, the opportunity to govern better is obvious in retrospect. Corruption can be reduced, and authority can be reorganised. Yet these possibilities often remain unrealised for long periods. The constraint is not only incentives, but the difficulty of persuading others that a different equilibrium is viable.

Even when such a cognitive shift occurs, most attempts at leadership fail because social systems resist coordination around unproven focal points. Demonstrating that an alternative equilibrium is even possible is itself a form of discovery. Many people have reformist ideas, but only a few manage to embed those ideas into structures that survive personal authority. Functional institutions depend on tacit knowledge about coordination and purpose that cannot be fully written down. Where this knowledge is not preserved, reforms collapse once the initial leader exits. What remains are institutions that mimic form without function.

Craftsmen, Not Strongmen

Discussions of leadership are often derailed by two common misconceptions. The first is that good leadership is primarily a matter of moral virtue. When leadership fails, the instinctive response is to demand leaders who are more ethical or less corrupt. Yet history offers little support for the idea that effective leaders are unusually virtuous in their private lives. What distinguishes those who successfully shifted social equilibria is not purity of motive, but the direction of their ambition.

In particular, they sought status from what they built rather than from what they owned. Their sense of prestige was tied to founding or reforming something that worked. This orientation makes a practical difference. A leader motivated by legacy has reason to invest in institutions that outlast them and to prioritise competence over loyalty alone.

The second misconception is that leadership is simply about how strongly you wield power. This image underlies the appeal of strongmen. Power can be used to coerce compliance, but it is a poor tool for solving coordination problems. Human societies are too complex to be run by command alone. Rules must be internalised and enforced by many actors who are not under constant supervision. Craft matters because it is how momentary coordination is converted into durable institutional knowledge. Leaders who rely primarily on coercion may achieve short-term order, but they rarely build institutions that function independently of their presence.

How to Get Lucky

If good leadership is rare, then the question remains whether it is possible to recognise and positively select for it. My heuristic would be that good leaders do not destroy value. This is not a heroic standard. It asks only that leaders leave a society with at least as much institutional capacity and organisational knowledge as they found.

In many developing countries, this is already a demanding criterion. Leaders who preserve and extend imperfect systems create room for improvement. Leaders who dismantle them in the name of purification make future possibilities even harder. Destructive leadership frequently presents itself as transformative, yet targeted or indiscriminate destruction is not reform. Good leaders try their best to make sure their society avoids scarcity.

The harder part is how to maximise the chances of getting good leadership. We cannot conjure a transformative leader by sheer will, but we can expand the possibility space from which one might emerge. This requires a stubborn refusal to succumb to the fatalism of bad equilibria. Instead, we must embrace a strategic hope, one manifested through what economist Stefan Dercon calls "pressure from below." When civil society, business coalitions, and emerging elites relentlessly demand more than mere extraction, they raise the floor of what is politically tolerable. Simultaneously, the "idea merchants" of the society must work to thicken the marketplace of ideas, carving out new cognitive niches that make better equilibria imaginable before they are even feasible.

1. Do Individuals Matter in Institutional Economic History? - Mark Koyama

2. My views here have been heavily influenced by Anton Howes - especially his essay - Is Innovation in Human Nature?