Once it reaches a certain threshold, the process of institutionalization becomes counterproductive
- Ivan Illich 
From a profile article on Illich and education at http://www.infed.org/thinkers/et-illic.htm :
"Finger and Asún (2001: 11) describe this as 'probably Illich's most original contribution'. Counterproductivity is the means by which a fundamentally beneficial process or arrangement is turned into a negative one. 'Once it reaches a certain threshold, the process of institutionalization becomes counterproductive' (op. cit.). It is an idea that Ivan Illich applies to different contexts. For example, with respect to travel he argues that beyond a critical speed, 'no one can save time without forcing another to lose it...[and] motorized vehicles create the remoteness which they alone can shrink' (1974: 42).
Finger and Asún 2001: 11) have commented,
Illich is not against schools or hospitals as such, but once a certain threshold of institutionalization is reached, schools make people more stupid, while hospitals make them sick. And more generally, beyond a certain threshold of institutionalized expertise, more experts are counterproductive - they produce the counter effect of what they set out to achieve. (http://www.infed.org/thinkers/et-illic.htm)
1. Kevin Carson:
"Subsidized inputs are closely related to the phenomenon of radical monopoly. They are tied together by Ivan Illich's concept of “counterproductivity.” Illich distinguished the “first watershed” of adopting a technology, in which it has net social benefits, from the “second watershed” beyond which it has negative benefits to society. Beyond the second watershed, the technology becomes counterproductive; society is brought into service to the technology rather than vice versa, and the technology imposes its logic on society.56 Society becomes dominated by radical monopolies.
But Illich failed to grasp the reason for counterproductivity. A technology will not normally be adopted by an unconstrained individual, of her own free choice, beyond the point at which the disutilities exceed the utilities. She will adopt a machine or tool, or a practice, for her own ends, when she fully internalizes the benefits, only because she judges the utility to her personally to outweigh the disutility. The second watershed is the point beyond which the marginal utility of further adoption would be zero if all costs and benefits were fully internalized by the decision maker. A technology or practice is adopted beyond the point where negative effects outweigh the positive, only when those making the decision to adopt it are able to collect the benefits while shifting the costs to others.
Illich treated counterproductivity not as a negative externality, but as a “negative internality” which was entailed in the process of consumption itself. But this is not accurate. Counterproductivity is not a “negative internality,” but the negative externality of others' subsidized consumption. Illich failed to identify the real consumer: the party who makes the decision to adopt and appropriates the benefits, while others pay the costs. The person who is forced to use the technology in her daily life, despite its unpleasantness, is not the real consumer; she bears the costs of a radical monopoly created for the benefit of another, who is the real consumer.
Where the bearing of cost is divorced from decision-making authority, decision-makers are enabled to consume uneconomical quantities of inputs without discipline by the market price system. Authority breeds conflict of interest wherever it is found, by enabling its possessors to shift effort downward while appropriating benefits for themselves.
For example, as Lloyd Dumas described it,
- The assumption that control is exercised by the cost bearers is nontrivial, and in some cases unrealistic. For instance, taxpayers bear the cost of the salaries of government employees. Yet, though rational, taxpayers are not necessarily in control of government personnel decisions. Hence it is quite possible that individuals will be hired whose salaries exceed the value of their work output in the eyes of the taxpayers. In the opinion of the government administrators doing the hiring, the value of the salaries may far exceed the opportunity cost of that use of budgeted funds. But the administrators are not paying the salaries—the taxpayers are. This situation is not peculiar to government. Managers of private corporations, for example, may engage in bureaucratic empire-building and hire people whose work output is less valuable than its cost, in the eyes of the stockholders and/or consumers who share the salary costs. It is thus the judgment of the decision makers that holds sway when the decision makers and the cost bearers are different individuals.
The same principle holds true not only in the case of public sector allocation of resources, but also in the private sector when systems of artificial property rights grant decision-making authority over property to actors whose de facto property rights result from no personal investment. For example corporate management, while in theory acting as agents of shareholders, in fact exercise virtually unaccountable authority over property which lacks any real owner. Senior corporate management, in practice, is a self-perpetuating oligarchy which controls the use of enormous masses of free-floating capital which they did not themselves contribute from their own effort or savings. In this regard, it is much like corporate managers in the Oskar Lange model of market socialism, as critiqued by Mises.
The manager of the market socialist enterprise is simply playing at entrepreneurship, because in the event of failure he risks losing capital which he did not himself contribute, while standing to gain if his decision pays off. The corporate CEO, likewise, reaps enormous bonuses in the event of a profitable quarter, whereas even a series of disastrous losses results only in his resignation with a golden parachute.
A major part of the economy consists of things which are paid for but produce no value, the moral equivalent of digging holes and filling them in again. Decision makers aim at maximizing net utility, not to society as a whole, but to themselves personally. If their power enables them to shift marginal cost downward relative to benefits, they will consume an input beyond its point of diminishing social utility. The same is true of business firms which decide on the amount of production inputs to consume based on their taxpayer-subsidized cost, rather than their real market cost.
Government subsidies to highways and airports, by distorting the cost feedback to users, destroy the link between the amount provided and the amount demanded. The result is an Interstate Highway System that generations congestion faster than it can expand the system to accommodate the congestion. Demand for new roads, expansion of existing roads, and maintenance of already built infrastructure, outstrips the revenue available for those functions. Although highway money is a top priority for the federal and state governments, it remains bottlenecked at any given time. The cost of repairing the most urgent deteriorating roadbeds and bridges is several times greater than the money being appropriated for that purpose."
2. Ivan Illich:
"Today, the moral imperative of ten years ago appears naive; today, few critical thinkers would take such an instrumentalist view of the desirable society. Two reasons have changed many minds: first, undesired externalities exceed benefits - the tax burden of schools and hospitals is more than any economy can support; the ghost towns produced by highways impoverish the urban and rural landscape. Plastic buckets from São Paulo are lighter and cheaper than those made of scrap by the local tin-smith in Western Brazil. But first cheap plastic puts the tin-smith out of existence, and then the fumes of plastic leave a special trace on the environment - a new kind of ghost. The destruction of age-old competence as well as these poisons are inevitable byproducts and will resist all exorcisms for a long time. Cemeteries for industrial waste simple cost too much, more than the buckets are worth. In economic jargon, the 'external costs' exceed not only the profit made from plastic bucket production, but also the very salaries paid in the manufacturing process.
These rising externalities, however, are only one side of the bill which development has exacted. Counterproductivity is its reverse side. Externalities represent costs that are ‘outside’ the price paid by the consumer for what he wants - costs that he, others or future generations will at some point be charged. Counterproductivity, however, is a new kind of disappointment which arises ‘within’ the very use of the good purchased. This internal counterproductivity, an inevitable component of modern institutions, has become the constant frustration of the poorer majority of each institution's clients: intensely experienced but rarely defined. Each major sector of the economy produces its own unique and paradoxical contradictions. Each necessarily effects the opposite of that for which it was structured. Economists, who are increasingly competent to put price-tags on externalities, are unable to deal with negative internalities, and cannot measure the inherent frustration of captive clients, which is something other than a cost. For most people, schooling twists genetic differences into certified degradation; the medicalization of health increases demand for services far beyond the possible and useful, and undermines that organic coping ability which common sense calls health; transportation, for the great majority bound to the rush hour, increases the time spent in the servitude to traffic, reducing both freely chosen mobility and mutual access. The development of educational, medical and other welfare agencies has actually removed most clients from the obvious purpose for which these projects were designed and financed. This institutionalized frustration, resulting from compulsory consumption, combines with the new externalities. It demands an increase in the production of scavenging and repair services to impoverish and even destroy individuals and communities, affecting them in a class-specific manner. The peculiarly modern forms of frustration and paralysis and destruction totally discredit the description of the desirable society in terms of installed production capacity.
As a result, slowly, the full impact of industralization on the environment becomes visible: while only some forms of growth threaten the biosphere, all economic growth threatens the ‘commons’. All economic growth inevitably degrades the utilization value of the environment.
Defense against the damages inflicted by development, rather than giving access to some new '’satisfaction’, has become the most sought-after privilege. You have arrived if you can commute outside the rush hour; have probably attended an elite school ifyou can give birth at home; are privy to rare and special knowledge if you can bypass the physician when you are ill; are rich and lucky if you can breathe fresh air; not really poor if you can build your own shack. The underclasses are now made up of those who must consume the counterproductive packages and ministrations of their self-appointed tutors; the privileged are those who are free to refuse them. A new attitude, then, has taken shape during these last years: the awareness that we cannot ecologically afford equitable development leads many to understand that, even if development in equity were possible, we would neither want more of it for ourselves, nor want to suggest it for others."