Several conversations I had at the recent Peak Prosperity conference in Sonoma, CA sparked an insight into why societies and economies thrive or fail: It All Boils Down to Scale. In a conversation with a Peak Prosperity member who goes by MemeMonkey, MemeMonkey pointed out that social / economic organizations that function well at small scales (i.e. localized) fail when scaled up and centralized (i.e. globalized).
I was immediately struck by the impact of scale on markets (Capitalism) and the state (Socialism), an ideological spectrum I’ve written about recently.
Both markets and governance function well at a small scale because those making the decisions must absorb the consequences of their actions/choices.
In large-scale centralized systems, those at the top of the wealth-power pyramid who wield the greatest influence are typically immune from the consequences of their (self-serving) decisions.
Indeed, the entire point of centralized hierarchies is to buffer top decision-makers from the consequences of their actions and choices.
This ties directly into Nassim Taleb’s most recent popularization of the critical role played by participants having “skin in the game,” i.e. exposure to the consequences of their actions and choices.
In a small localized group, it’s basically impossible for anyone, even those at the top of the local welth-power pyramid, to escape the consequences of extractive activities that disupt the local ecosystem.
For example, should overfishing destroy the local fisheries, even the leaders no longer have access to fish.
Should the leadership pursue a conflict with a neighboring tribe, the leaders are just as likely to be killed or maimed as any participant (and very possibly more likely to be killed/injured, as leaders are naturally high-value targets).
History offers many examples of leadership that suffered the consequences of their poor choices/strategies. In the catastrophic Roman defeat at Cannae, roughly a third of Rome’s entire political leadership elite was killed in combat. This is the acme of “skin in the game,” a point Taleb makes by noting that our political leadership is free to pursue wars of choice with zero risk of being killed on the battlefield. No wonder it’s so “cost-free” for leaders of highly centralized hierarchies to pursue disastrous policies: they evade any of the consequences or blowback.
In a conversation with fellow Peak Prosperity scribe Davefairtex, Dave described the centrality of the reward structure of cheating: approximately 20% of the populace experiences an outsized positive brain-chemistry reward (dopamine release) when they get away with some form of cheating–passing off a lie or deception or successfully concluding a fraud or scam.
A similar percentage of humanity is genetically predisposed to experience outsized brain-chemistry rewards for detecting and revealing cheating.
Dave also noted that human groups (and primate groups including monkeys, chimpanzees, et al.) become very agitated when group standards of fairness are flouted.
Cheating–broadly speaking, what’s known as the “free-riding problem,” as cheaters get a free ride on the work of everyone who abides by the rules and fulfills their duties– pays dividends.
Males who father children via a secret tryst with a married woman pass on their genes without having to support their offspring or the mother. Cheaters who reap unearned wealth from the group benefit by slicing off some of the income and wealth of everyone else in the group.
So there are powerful incentives to cheat and equally powerful incentives to ferret out and expose cheaters, lest the group dissolve and everyone is tossed out to face the world (and potentially hostile groups) alone.
This conversation made me realize this is partly why small-scale markets and groups succeed: cheaters must work in a small theater where their actions are more easily observed and exposed. It’s therefore much more difficult to get away with systemic cheating in small-scale organizations.
Compare this to the vast centralized hierarchies that are the controlling dynamics of our socio-political-economic system (i.e. our Mode of Production). Cheaters at the top of the wealth-power pyramid hire slick attorneys to evade consequences, or they buy political influence/protection, in effect legalizing cheating by those at the top of the pyramid in systemic ways.
Once we grasp the critical role played by scale, we conclude that centralized hierarchies cannot function effectively because their scale makes it too easy and too rewarding for those at the top of the wealth-power pyramid to cheat and evade consequences.
Only small-scale markets and structures of governance can succeed in the long run because only these small scale systems can sustainably impose “skin in the game”– consequences, accountability and oversight.
State-issued currency (“money”) is the perfection of a centralized system: here is the Venezuelan national currency the bolivar, a once-stable currency obliterated by Venezuela’s political-economic elite:
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