Why is it that complex civilizations – not just some of them, but ALL of them – tend to ultimately collapse? Read on to find out Joseph Tainter’s answer... and the unsettling parallels we face today...

Two quick comments on Tuesday’s piece, “Why I Don’t Care About Fixing The World”:

Justice,

I was wondering if the recent theft from Goldman Sachs of their trading program has left you.....bitter?
Has it taken away from you your sense of fair play?

...I understand that you still need to react to these curveballs, but do you think that the average "investor" still can turn an advantage from government and corporate control of the markets?

– TD reader Ed

Bitter? You mean because I’ve lost my interest in fixing stuff? Oh, heck no. Mildly amused is more like it.

It seems to me Viennese satirist Karl Kraus said it best: “Things are hopeless, but not serious.” A fairly accurate summation of human nature and the world at large, when you get right down to it. The “hopeless” part is hard to argue with. Meanwhile the “not serious” part leaves plenty of room for love, laughter, adventure, and all the little things that make life worth living.

As for Government Sachs seeing the recipe for their secret sauce get hijacked... I say “meh.”

Are markets rigged by nefarious insiders? More or less, sure. There are some shady dealings going on, no doubt. But it’s always been this way – and I do mean always.

In Reminiscences of a Stock Operator, an 86-year-old tome considered one of the greatest trading books of all time, the pseudonymous narrator recounts all kinds of stuff the market manipulators used to do back in the day. But that didn't stop Jesse Livermore (the real-life trader whose life and times were chronicled in Reminiscences). He went up against the manipulators as a "lone hand" (his own term) and made millions anyway.

Like the poor, the insiders, too, have always been with us. The concept of the modern corporation goes all the way back to Roman times – and that means insider trading and blatant market rigging probably do too. Recounting the mania of the Republic’s final days, Petronius Arbiter wrote:

...filthy usury and the handling of money had caught the common people in a double whirlpool, and destroyed them... the madness spread through their limbs, and trouble bayed and hounded them down like some disease sown in the dumb flesh.

Hey, sounds like 2008!

For more than two millennia, markets have been the same. It was about human nature then, it’s about human nature now, and it will still be about human nature another 500 years from now. Shenanigans are just part of the landscape. Always have been. Why be bitter?

I forget who said it, but the phrase “The mass of men lead lives of quiet desperation” has held true through the millennia.

So to counter that and build a life that gives you wings and lets you soar to your own inclinations, in your own time, is the ultimate revenge against the machinery that grinds away at the world and it’s teeming masses.

Amen to you, brother . . .

– TD Reader Jon S.

That was Henry David Thoreau, I believe. Very nicely put, re, spreading wings... the only thing I would add is that the revenge motive kind of peters out after a while. Sort of like getting mad at the universe, you know? Not much point in it.

And yet, a burst of anger can still be quite therapeutic at times – like a cleansing summer thunderstorm. (Or maybe that’s just my excuse for getting bloody-minded mad every so often. Who knows.)

The Collapse of Complex Societies

Now, to today’s business at hand... I’ve been trying to figure out how to work in some of the reader responses on organized crime from a week or so ago (okay, two weeks or so ago). I keep getting derailed by rabbit trails in my quest – but in my defense the rabbit trails have proved quite interesting, no?

Thinking about the presence of organized crime, and the subtle (or not-so-subtle) negative effects it has on society, I was reminded of a book that feels all too relevant to the times – The Collapse of Complex Societies by Joseph Tainter.

The question that Tainter pursues is an unsettling one. Why is it that complex civilizations – not just some of them, but ALL of them – tend to ultimately collapse?

Of course Tainter does not have a crystal ball, and neither do we. Maybe some future civilization will be the first to buck this ring-around-the-rosy trend (ashes to ashes, we all fall down). But thus far, the survival rate of all great civilizations (i.e. complex societies) noted in antiquity has been zero.

If the question is unsettling, Tainter’s explanation is more unsettling still. Sufficient levels of complexity, Tainter theorizes, will over time guarantee society’s collapse – thanks to the law of diminishing returns.

If you are a hunter gatherer, your list of worries is brutal but short. In today’s modern world, however, there is an insane amount of complexity to consider – and the more complex life gets, the less effective the proposed solutions become. Beyond a certain point of no return, costs rapidly rise even as return on investment falls.

Like with baby boomers and healthcare, for instance. There is little doubt that, medically speaking, baby boomers will be the most demanding generation in history by an order of magnitude. You’ve heard the saying “50 is the new 40”? The boomers will want 80 to be the new 40. They will live by the motto, “Hope I die before I get old...” but, not wanting to die, they will instead settle for simply not getting old. Ever. They will demand the latest and greatest healthcare treatments, no matter how costly or exotic, in order to preserve their sense of youth as far down the line as possible. In pursuit of “forever young,” no expense will be spared.

But of course, this attitude will prove impossible to sustain. Much as the boomers won’t like it, they will still have to get old (and die) as the generation prior did. Meanwhile, the costs for providing incremental treatment – those marginal efforts taken to force back the hands of time – will spiral out of control as ROI diminishes. Ultimately, in the name of fiscal sanity, someone will have to say STOP!

But the way Tainter sees it, when it comes to the collapse of complex societies, no one has a sufficiently loud enough voice to yell STOP. Instead, as societal complexity grows, the sense of entitlement grows too – often in lockstep with the burden of empire.

And eventually, the proposed solutions for all these new problems, real or imagined, become unfixable problems in and of themselves. Then the downward spiral begins.

Government Fleas

Another way to look at this is to imagine a dog – a happy golden retriever, say – servicing a modest family of fleas. As long as the dog stays healthy and the fleas don’t get greedy, the relationship remains sustainable.

But what happens if the normal fleas are replaced with mutant fleas? What if the fleas keep getting bigger and bigger, finally threatening to drink the dog dry? The dog then becomes anemic. His vitality and vigor are slowly drained away. Eventually the dog loses interest in going to the park, or barking at the neighbor’s cat, or doing much of anything at all... and in due time the dog collapses.

The dog/flea metaphor can be applied to the effects of organized crime on society. Crime “pays” by diverting the flows of productive labor from hard-working law abiders into the pockets of sophisticated criminals – just as the protein-rich blood of the dog is diverted into the hungry mouth (proboscis?) of the flea.

The flea metaphor can also be applied, as you have probably already deduced, to the actions of government.

In its official role as “solution provider,” enabled by the democratically endorsed will of the people, government has the potential to unleash the ultimate onslaught of mutant fleas. And of course, just as no single raindrop considers itself to blame for the flood, no single flea would ever consider itself to blame for the ultimate collapse of the dog.

Perhaps what Tainter describes, then, could be a sort of “tragedy of the commons” writ large, at least as it applies to complex civilizations of the democratically governed sort.

One can’t help but think on this in light of the broad sweep of current events...

The world has just experienced the most catastrophic collapse in credit and trade since the 1930s – the aftershocks of which are still very much being felt.

Meanwhile, in the United States at least, the private sector (a.k.a. the “free market”) is at its weakest and most vulnerable point in decades. The overhang of excess capacity is high. The flow of credit, particularly consumer credit, has slowed to a trickle. The hungry maw of government, gluttonous in the best of times, has become absolutely ravenous, with trillions of dollars in U.S. government debt issuance set to crowd out private investment capital flows.

And yet now, right now, is the time that America as a nation has chosen to tackle global warming and national healthcare reform – two of the most mind-bogglingly complex, massively expensive “solution” agendas in all of recorded human history. Talk about precious lifeblood! Talk about diminishing returns!

I wonder what Tainter would say? “Gee guys, thanks for working so hard to prove out the theory of my book in real time. Should make for a fascinating new edition one of these days. But you know, uh, it really wasn’t necessary...”

The one bit of upside in this gloomy reality is this. If you know how to handle volatility, you stand a good chance of making a heck of a lot of dough in the months and years ahead.

Paul Tudor Jones, known to many as the “Michael Jordan of trading” for his legendary exploits in the 1980s, is a multi-billionaire “global macro” trader (the particular style of trading to which your humble editor is devoted). On being asked in 2008 how global macro would fare over the next five years, Jones replied: “The macro space will be great. I think we’re going into one of those slow or zero-growth periods in the U.S., which will give us a lot of volatility.” Amen to that!

One last comment from Tuesday’s “Fixing the World” piece that ties in nicely here:

Justice,

For the most part, I agree with the views expressed in this column.....operative phrase being "for the most part."

Retiring wealthy may be difficult to accomplish when you keep score with a measure that fast is fading from the scene ($)…

– TD reader Jim R.

Good point Jim. Just to quibble a tiny bit, though – I don’t recall anything about keeping my wealth restricted to U.S. dollars. (Twenty years from now, that might not even be an option for all we know!)

Imagine, if you will, being present during the fall of Rome. Would you be overly worried about how to stop Rome from falling? I would say not. Chances are you wouldn’t even know it was falling. But even if you had a very strong sense that things were going to pot, you probably wouldn’t waste much time trying to keep history from happening... would you?

Instead, you’d be busy tending to your own garden... taking care of your own affairs... focusing on deliberate, pragmatic actions in the sphere of influence where you do have meaningful control. That would most certainly include getting out of the fading local currency when the time is right – or otherwise taking advance measures so as not to be flattened by the tumbling marble columns.

Other Related Topics: Government Issues , Justice Litle , Macro Trader

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