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The Collapse of Business Models And The Decline of Nations

April 6, 2010

A recent Clay Shirky post on the rise and fall of big media is stirring up some discussion. (Isegoria here and Anomaly here.) Old lead-footed institutions die hard, Shirky says, but when they finally succumb–look out–because the fall is fast and swift.  Sure, they might see it coming, but because of their size and ossified culture, these institutions are constitutionally incapable of adjusting. The new circumstances demand a simplicity they can’t handle. Meantime, institutional momentum keeps these hulks around in a kind of free floating twilight. Kevin Kelly distills this into the Shirky Principle:

  • “Institutions will try to preserve the problem to which they are the solution.”

And Shirky’s not talking about non-profits. He’s talking about newspapers and television. Anyway, what’s interesting is that to frame his discussion about myopic TV executives, Shirky appeals to the theories of decline set forth in Joseph Tainter’s The Collapse of Complex Societies. Shirky writes:

Tainter’s thesis is that when society’s elite members add one layer of bureaucracy or demand one tribute too many, they end up extracting all the value from their environment it is possible to extract and then some.

The ‘and them some’ is what causes the trouble. Complex societies collapse because, when some stress comes, those societies have become too inflexible to respond. In retrospect, this can seem mystifying. Why didn’t these societies just re-tool in less complex ways? The answer Tainter gives is the simplest one: When societies fail to respond to reduced circumstances through orderly downsizing, it isn’t because they don’t want to, it’s because they can’t.

In such systems, there is no way to make things a little bit simpler – the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn’t regard the sudden decoherence of these societies as either a tragedy or a mistake—”[U]nder a situation of declining marginal returns collapse may be the most appropriate response”, to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites.

When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification.

I haven’t read Tainter’s book. I do think this idea of complexity points in the right direction. Still, I don’t believe it’s fine-grained enough to provide an adequate explanation for the problem. Complexity describes a property not a mechanism. That is, not all complexity is bad. For instance, the uncontested levers of prosperity–free trade, property rights, the rule of law and so forth–these simple rules can generate some very complex, but resilient societies. So it’s a certain kind of complexity we should be concerned with, one that acts as a trigger for institutional sclerosis.

We’ve proposed two mechanisms (along with Cardwell and Mokyr and Romer): stronger and broader barriers to entry established by vested interests with political power. Throw some self-interested people into this mix and we can see why old institutions try to preserve the problems they were the solution to. These folk fear losing the rents they currently collect. And perhaps this is what Tainter means when he refers to accumulating bureaucracy and tribute.

But what’s a bit misleading is Shirky’s analogy. Profit-maximizing companies are different beasts from societies as a whole (or systems of governance). The fall of GM is not the fall of Rome. It could be that a similar mechanism of decline works within large corporations: high level managers create barriers to prevent the ascension of profit-making ideas from below. But we can’t simply point to vague concepts like “bureaucracy” and “tribute.” At the level of the firm, that doesn’t seem to explain enough.

Still, Shirky’s last paragraph is prophetic. I can’t help but extrapolate from media to governance:

When ecosystems change and inflexible institutions collapse, their members disperse, abandoning old beliefs, trying new things, making their living in different ways than they used to. It’s easy to see the ways in which collapse to simplicity wrecks the glories of old. But there is one compensating advantage for the people who escape the old system: when the ecosystem stops rewarding complexity, it is the people who figure out how to work simply in the present, rather than the people who mastered the complexities of the past, who get to say what happens in the future.

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6 Comments
  1. April 8, 2010 10:14 am

    Profit-maximizing companies are different beasts from societies as a whole (or systems of governance).

    I’m afraid I couldn’t disagree more. A friend of my father worked at Lucent in the final days before the Alcatel merger, and he often described the activities of management in feudal terms “The barons did this, the serfs did that” because the analogy worked.

    Governments, Societies and Corporations are all methods by which self-interested individuals co-operate to achieve high-level, mutually-beneficial goals. Whilst on a crude level, the organisations may seem very different, they are all made of the same stuff — people — thus the same praxeology can be applied. Furthermore, certain tropes; stable sub-structures — empire building, rent-seeking — crop up in all three.

    I’ve been meaning to write a post on this over at FreeSoc for a while now, but I believe that organisations — governments, societies and corporations — often support cancerous tumors; sub-structures that benefit someone else within or without the organisation, at the expense of the organisation as a whole.

    Larger and more complex organisms — pardon — organisations, can support larger and more aggressive forms of cancer. The largest we know of — governments — often appear to be little more than a collection of tumors, huddled together under the gushing hose of taxpayer cash.

    Likewise techniques that work in corporate government — internal markets, regular audits, independently profitable sub-divisions — are very successful when applied to their larger siblings.

    • Mike Gibson permalink*
      April 8, 2010 9:56 pm

      I feel you bro.

      But governments can coerce, whereas most firms do not wield the same bargaining power over their revenue base. Likewise governments are far abler drawing on sympathies of loyalty and nationalism than a Coke or Pepsi are.

      All of which means governments can support greater cancerous excrescences than a private firm can. That’s not to deny that cronyism and patronage occur. But the firm will go out of business much, much sooner than the men with the guns.

      It is undeniably true that large firms have trouble innovating, and consequently surviving. And the long run doesn’t look so good for any current market leader. The turn over in the Fortune 500 is astounding. Take a look who was on it 50 years ago and only a fraction are still around.

      On the other hand, Govs have been around much, much longer. Yours, for at least 1,000 years. That puts things into perspective.

      • April 9, 2010 3:25 am

        Absolutely. I would have developed all those themes if I’d spent a little more time on the post. Some non-sovereign corporations do coerce; the Yakuza and the EHIC are two suitably morally ambiguous examples.

        My argument I guess, is that the difference between a government and a corporation, and by extension the — and here I borrow a term from Mencius Moldbug — “informal” substructures it supports, is a quantitative and not a qualitative one.

        A for-profit company with the size and structure of ancient Rome would collapse like it. Many structures of government as you rightly point out, only work because the government can coerce, and is thus massively profitable for those involved in the industry.

        I postulate that: it is the profit margin, and not the existence of the coercion that leads to the massive semi-stable levels of atrophy we see in modern governments. (I say semi stable, because the entire demotist edifice is inherently unstable; more stable than the USSR, but not as stable as the British Empire)

  2. April 10, 2010 3:25 pm

    But we can’t simply point to vague concepts like “bureaucracy” and “tribute.” At the level of the firm, that doesn’t seem to explain enough.

    Other discussions of Tainter’s work point to notions that may explain more.

    One notion is the human tendency to escalate commitment – the Concorde fallacy or the sunk cost effect.

    Another is the irrational behavior that is a characteristic of groups, their tendency to reject feedback from reality that would disrupt their unanimity, their group consciousness, their consensus, since they worked so hard for so long to create the consensus.

    There is also the lack of heuristic diversity in meritocracies, or bureaucracies for that matter, which is related to the group consensus problem but the damaging effect is that the group is dumbed down as a problem solving entity.

    • Mike Gibson permalink*
      April 12, 2010 4:43 pm

      Thanks for that reference. Very edifying.

  3. April 10, 2010 3:57 pm

    Some blog posts I found from Timothy Lee discussing Clayton Christensen’s “The Innovators Dilemma” also seem relevant.

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