Musings Report 2018-19 5-12-18 It All Boils Down to Scale
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It All Boils Down to Scale
Several conversations I had at the recent Peak Prosperity conference in Sonoma sparked what I view as a far-reaching insight into why societies and economies thrive or fail: It All Boils Down to Scale.
In a conversation with a member who goes by Mememonkey on the Peak Prosperity site, 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 wealth-power pyramid, to escape the consequences of extractive activities that disrupt 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 particiapnt (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 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, accountability or blowback.
In a conversation with fellow Peak Prosperity scribe Davefairtex (he writes the daily and weekly precious metals/financial commentary), Dave described the centrality in human life 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 and cheaters.
Dave also noted that human groups (actually, 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 female 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 must face the world (and potentially hostile groups) alone.
This conversation made me realize this is partly why small-scale markets and groups succeed: in a localized market or group, 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.
The consequences of being caught cheating are also much harsher and more immediate in a localized ecosystem: the ultimate punishment is banishment, in a hunter-gatherer scenario a life-threatening isolation. So cheaters are not only more likely to be caught--they're also much more likely to suffer grave consequences when caught.
Compare that 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 can hire slick attorneys to evade consequences; or they can buy political protection, in effect legalizing cheating 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 to cheat and/or evade exposure and consequences.
Only small-scale markets and systems of goverance can succeed in the long term because only these small scale ecosystems can impose "skin in the game"-- consequences, accountability and oversight.
Highlights of the Blog This Past Week
Before You Tell Me What You "Know," Tell Me Your Sources
Team Human podcast with Douglas Ruskoff: #84 CHARLES HUGH SMITH “INVESTING IN COMMUNITY”
Best Thing That Happened To Me This Week
Making progress on my secret project, a new just-for-fun mystery novel titled "The Consulting Philosopher."
Market Musings: The Monthly Ramp in S&P 500
NorthmanTrader.com posted an interesting chart of the S&P 500 (SPX) which reveals a nearly identical ramp at the beginning of the past few months.
Notice how each ramp reversed into a sharp decline.
Two rather reliable patterns are the descending (bullish) wedge (shown here on the VIX) and the ascending wedge (bearish) that characterizes these monthly ramps in the SPX.
Each rally in the SPX since the February free-fall has been a bearish ascending wedge. Note the alignment with stochastics reaching overbought levels.
Meanwhile, the VIX (volatility index) which has been pounded into the ground in the current ramp, has a bullish ascending wedge in play.
Judging by the CPC (put-call ratio), Bullish sentiment hit a high not seen since late January, just before the SPX reversed in a free-fall.
The above data points should give Bulls pause.
From Left Field
Everyone Needs a Close Community, but Those Are Fewer and Fewer -- a flawed but interesting measure of social capital
The shopping centre where the currency is hope -- 5,000+ shops have closed in Britain in 2018...
Imminent peak oil could burst US, global economic bubble - study "Given that there is substantial evidence that Peak Oil is imminent, the paucity of research looking at the potential economic impacts of this phenomenon is surprising."
How Futures Trading Changed Bitcoin Prices (via Maoxian)
How Xi Jinping Views the World (registration required)
Dimartino-Booth: The Great Contagion
We’ve Known for 400 Years That Torture Doesn’t Work -- the Inquisition...
‘One Has This Feeling of Having Contributed to Something That’s Gone Very Wrong’ (the Internet)
"Magic is believing in yourself, if you can do that, you can make anything happen." Goethe
Thanks for reading--
charles |
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